ReviewShadow vs. market prices in explaining land allocation: Subsistence maize cultivation in rural Mexico

Prices may fail to explain farmers' land allocation if the relevant decision prices are “shadow prices” that deviate from market prices. This may be the case for farmers who attach significant non-market values to their crops. I theoretically explain why land allocation may not respond to market signals even if transaction costs are not binding. I use nationally representative rural household data from Mexico to show that shadow prices better explain the land subsistence farmers allocate to traditional maize in this center of maize diversity. I discuss the importance of non-market values in understanding supply response and on-farm conservation of traditional crops.

► Market prices do not fully explain farmers' land allocation if the relevant decision prices are shadow prices. ► Shadow prices capture the cultural and non-pecuniary values of cultivating/consuming some crops. ► Shadow prices better explain how subsistence farmers of traditional maize in rural Mexico make land allocation decisions. ► The non-market values captured by shadow prices tend to be more important in centers of domestication and diversity. ► A better understanding of shadow prices in such centers can improve the targeting of on-farm conservation policies.