Are Indian Farms Too Small? Mechanization, Agency Costs, and Farm Efficiency

New panel data from India are used to examine the relationship between farm size and productivity based on a model incorporating agency costs favoring family workers, scaledependent returns to mechanization arising from the fact that a larger contiguous land area is better-suited for high-capacity machinery, and falling credit costs with owned land. The model provides guidance for imputing the shadow price of labor in the presence of agency costs. Estimates based on appropriately-computed labor shadow prices indicate that while small farms have lower unit labor costs, large farms use substantially less labor per acre, are more mechanized and more efficient.