Farm‐to‐market transaction costs and specialisation in small‐scale agriculture: Explorations with a non‐separable household model

Abstract

Using an integrated household model with endogenous transaction costs, this article illustrates how, even in the absence of risk, the tension between gains from specialisation and corresponding increases in transaction costs may lead to enterprise diversification on small farms. A numerical example illustrates that this tension may contribute to the prevalence of inter‐cropped cash‐crops on small farms, in apparent disregard for foregone yield and income from greater specialisation involving pure‐stands. By implication, measures that augment households’ abilities to override trading costs may be critical complements to efforts seeking to raise productivity and incomes in small‐scale agriculture via increased specialisation.