Purpose This study estimates the extent of misallocation in agricultural production and analyzes how distortions drive wedges between the marginal products of capital and labor at the farm level. The study also evaluates potential aggregate total factor productivity and yield gains through the reduction of misallocation, while examining the impact of agricultural machinery outsourcing services (AMS) on misallocation. Design/methodology/approach We develop a theoretical framework that incorporates labor and capital distortions. We apply this framework to rice production in China, propose a resource distortion index and introduce sources of agricultural distortions at the smallholder farmer level. Findings The results reveal widespread farm-level resource misallocation in the surveyed region. Aggregate productivity (output) gains can be increased by 12%–52% if factors were reallocated from less productive to more productive farms. Our results further show that the use of AMS alleviates resource misallocation among farmers. Originality/value This study extends the existing quantitative framework and its applications by considering the distortions of capital and labor. Additionally, it estimates the role of AMS in agricultural misallocation and finds that AMS significantly alleviates resource misallocation.
Sun et al. (Fri,) studied this question.