Reconsidering Conventional Explanations of the Inverse Productivity–Size Relationship

SummaryThe inverse productivity–size relationship is one of the oldest puzzles in development economics. Two conventional explanations for the inverse relationship have emerged in the literature: (i) factor market imperfections that cause cross-sectional variation in household-specific shadow prices and (ii) the omission of soil quality measurements. This study employs precise soil quality measurements at the plot level with multiple plots per household so as to test both conventional explanations simultaneously. Empirical results show that only a small portion of the inverse productivity–size relationship is explained by market imperfections and none of it seems attributable to the omission of soil quality measurements.