The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
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The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
The Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiand University of MarylandDraft:37546Abstract:This paper presents and tests a model of agricultural labor exchange teams using primary data from Indonesia. Farmers participate m labor exchange in order to take advantage of technological benefits from teamwork and to substitute for paid labor when lab The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaor and capital markets fail. Because of the reciprocal exchange of labor time under labor exchange, returns to teamwork are a necessary condition forThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
the use of exchange labor when non-household labor exhibits moral hazard. Missing markets alone cannot explain labor exchange, but as markets fail excThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesias to explain both the prevalence and persistence of this institution in developing countries. The empirical model tests for the decision to use labor exchange with and without working capital constraints for the sample of Indonesian farmers. Results show that an increase in the supply of market labo The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiar reduces demand for labor exchange only among households constrained in working capital. Consistent with the theory, an increase in farm size has noThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
effect on the decision to use labor exchange for households that are not liquidity constrained, but has a significant positive effect for constrained The Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiamments welcome. Email: d.gllliganfflcglar.org,I would like to thank Ramón Lopez, Robert Chambers, Marc Nerlove, Nancy Bockstael, Kenneth McConnell, Harold Kelejian, Tulika Narayan, Jonathan Alevy, Emmanuel Skoufias and seminar participants at 1FPRI for helpful discussions about this research. 1 grat The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaefully acknowledge financial support from the World Bank and assistance from the Center for Agricultural Socioeconomic Research (CASER) in Bogor. IndoThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
nesia with the data collection. I thank both the World Bank and CASER for permission to use the data. All remaining errors are my own.I. IntroductionTThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaanners form a work team that performs a task such as planting, weeding or harvesting crops on each team member's farm in succession. Labor time is traded reciprocally without pay, with the possible exception of a mid-day meal. Various forms of this lasting labor institution continue to be used in ma The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiany parts of the developing world? Research into the determinants and benefits of labor exchange has been limited almost entirely to sociological studiThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
es. Many sociologists have predicted that the prevalence of labor exchange will decline as markets develop because the teams require coordination of hThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiast sociologists have claimed that the institution of labor exchange is in decline. However, Guillet (1980) and Chibnik and de Jong (1989) emphasize its persistence and argue that predictions of the demise of labor exchange are mostly unrealized.1 2The main reasons cited for farmer participation in l The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaabor exchange are to take advantage of technological benefits from teamwork and to substitute for paid labor when labor and capital markets fail. SociThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
ological studies have identified as possible returns to teamwork available through labor exchange (i) greater speed in completing time-sensitive tasksThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiahin a season (Worby (1995)), and (iv) psychological benefits from working with others (Moore (1975) and Goethals (1967)). The missing markets argument for labor exchange is that it substitutes for scarce market labor during peak periods of demand (Moore (1975)) or in regions with1 For evidence, see The Determinants of Agricultural Labor Exchange Theory and Evidence from IndonesiaGeschieie (1995) on Cameroon; Fafchamps (1993) on Burkina Faso; Worby (1995) on Zimbabwe: Barnard (1970) on Malaysia: Ganjanapan (1989) on Thailand: FThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
egan (1989) on the Philippines: Guillet (1980). Chibnik and de Jong (1989), and Jacoby (1992) on Peni; and Erasmus (1956, 1961) on other regions in SoThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaby French farmers.■ There is even evidence of a resurgence of labor exchange in response to increased commercialization of farm output in Peru (Chibnik and de Jong (1989)) and following agricultural intensification in Zimbabw e (Worby (1995)).abundant or uniformly distributed land (Geschiere (1995)) The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia. When credit markets fail, exc hange labor oilers a source of labor Io farmers who are constrained in holdings of working capital (Moore (1975)). ThiThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
s argument is consistent with the principles of transaction cost economics (see Coasc (1937) and Williamson (1979,1986)) wherein the institution of laThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiat hand. Another motivation for labor exchange that has received less attention is output quantity and quality gains due to stronger incentives to work and monitor teammates in tins revolving rec iproc al exchange (see Worby (1995)).Economists have almost entirely ignored labor exc hange, but the pre The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiasence and persistence of this institution has important implications for research on the performance of rural factor markets and therefore on rural deThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
velopment. If labor exchange arises primarily as an institutional response to failure of rural labor and credit markets, then the prevalence of labor The Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaalyses of the welfare costs of missing markets or the potential benefits of the commercialization of agriculture. Under this “missing markets hypothesis,” the importance of labor exchange should fade as markets develop. If, on the other hand, technological considerations relating to teamwork dominat The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiae the decision to use exchange labor, demand for this institution will be closely related to the characteristics of local production (e.g.. crop choicThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
e, water use) and may persist even as markets develop.Il is difficult to assess the relative strengths of each of these explanations lor labor exchangThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaormal model of labor exchange and testing the theory using primary data on farm households in Indonesia. Tn the theoretical model, an agricultural household decides whether to participate in labor exchange given a production technology with increasing returns to teamwork, possible rationing in the c The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaredit market, and transaction costs in the paid labor2market and in labor exchange. In addition, hired labor is subject to moral hazard and must be suThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
pervised in order to be productive.From this model it is possible to contrast the technology-based explanations for labor exchange with arguments baseThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia. Labor time employed on farm through labor exchange must be reciprocated with household labor time off farm. This results in a net decline in effective labor hours on farm due to supervision costs arising from moral hazard. The inability of labor exchange to increase labor hours on farm makes it a The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesialimited substitute for market labor, effectively substituting only for team labor demand from the market. Therefore, missing markets alone cannot explThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
ain the use of exchange labor. However, where labor and credit markets have failed, exchange labor will be more common. The model also predicts that tThe Determinants of Agricultural Labor Exchange: Theory and Evidence from IndonesiaDaniel o. Gilligan' International Food Policy Research Institute an The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiace and wage rates) on the decision to use labor exchange will differ systematically depending on whether the household is constrained in its holdings of working capital. Endowments, for example, will play a larger role for households that are working capital constrained. Results also show how the in The Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesiaterplay of these missing market and technological determinants of labor exchange help to explain both the prevalence and persistence of this institutiThe Determinants of Agricultural Labor Exchange Theory and Evidence from Indonesia
on in developing countries.The model developed here is a generalization of the models of the organization of agricultural production by Eswaran and KoGọi ngay
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