Should Farmers Farm More? Comparing Marginal Products within Malawian Households

According to standard economic theory, households should equate the marginal revenue product of an input across activities within the household. Using data on agricultural plots and non-farm enterprises in Malawi, we test whether the marginal revenue product of labor (MRPL) is equal across agricultural and non-farm production within a household. We control for many household and production characteristics, including household fixed effects, and find agricultural MRPL to be consistently higher than non-farm MRPL. These results hold when restricting estimation to periods of high and low non-farm labor allocation. Further analyses suggest both production and price risk may be partially responsible for these deviations from MRPL equality. We also show that comparing average revenue products of labor is not sufficient evidence for claiming allocative inefficiency. In our data, the average revenue products of labor lead to an erroneous conclusion, reiterating the need to compare marginal products when testing for allocative efficiency.