Trapped in Agriculture? Credit Constraints, Investments in Education and Agricultural Employment

Ruxanda Berlinschi, Johan Swinnen and Kristine Van Herck
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Ruxanda Berlinschi: 1] LICOS – Centre for Institutions and Economic Performance, KU Leuven, Leuven, Belgium[2] Department of Economics, Hogeschool Universiteit Brussel, Brussels, Belgium
Kristine Van Herck: LICOS – Centre for Institutions and Economic Performance, KU Leuven, Leuven, Belgium

The European Journal of Development Research, 2014, vol. 26, issue 4, 490-508

Abstract: The basic neo-classical model implies that agricultural employment responds positively to increases in farm income. This argument is assumed by proponents and critics of agricultural subsidy programs in their discourse in favor of or against government support for farmers. However, empirical evidence on the relationship between agricultural employment and farm income (and subsidies) is mixed, and some studies find evidence that an increase in farm income has a negative impact on agricultural employment. This article proposes a new explanation for this puzzle. When farm income increases, part of the additional income is invested by credit-constrained farmers in their children’s education and educated children are less likely to become farmers themselves. We provide a theoretical model and empirical evidence supporting this argument.

Date: 2014
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