The Extent of the Market and Stages of Agricultural Specialization

This paper provides empirical evidence of an U-shaped relationship between the extent of the market (size of the relevant urban market) and the pattern of crop specialization in a village economy. We use the recent two-stage estimator developed by Lewbel (2007) and exploit heteroskedasticity for identification of the causal effects of market size. The results suggest that the portfolio of crops in a village economy becomes more diversified initially as the extent of the market increases. However, after the market size reaches a threshold, the production structure starts to specialize again. This evidence on the stages of agricultural diversification is consistent with the stages of diversification identified in the recent literature for the economy as a whole and also for the manufacturing sector. JEL Codes: O12, R11, R12