Agricultural Risk, Intermediate Inputs and Cross-Country Productivity Differences∗

Agricultural labor productivity is key for understanding aggregate cross-country income differences. One important proximate cause of low agricultural productivity is the low use of intermediate inputs, such as fertilizers, in developing countries. This paper argues that farmers in poor countries rationally choose to use fewer intermediate inputs because it limits their exposure to large uninsurable risks. I formalize the idea in a dynamic general equilibrium model with incomplete markets, subsistence requirements and idiosyncratic productivity shocks. Quantitatively, the model accounts for two thirds of the difference in intermediate input shares between the richest and poorest countries. This has important implications for cross-country productivity. Relative to an identical model with no productivity shocks, the addition of agricultural shocks amplifies per capita GDP differences between the richest and poorest countries by nearly eighty percent. ∗I owe a huge debt to Berthold Herrendorf, David Lagakos, Ed Prescott, and Todd Schoellman for their constant support and guidance. Thanks also to participants at Arizona State, the Federal Reserve Bank of St. Louis, Washington State University, the CEA Annual Meeting, the Econometric Society NASM, Midwest Macro, and the SED Annual Meeting for comments and insights, especially Alex Bick, Chris Herrington, Dan Lawver, B. Ravikumar and Don Schlagenhauf. The usual disclaimers apply. †Contact Info: Department of Economics, Arizona State University, P.O. Box 879801, Tempe AZ 85287-9801. Email: [email protected]