Modeling the Transition From Smallholders to Large Farms : Theory and Evidence From Livestock Production

The transition from smallholders to large farms in developing countries has attracted rising attention. We present an integrated theoretical framework that examines the dynamics and welfare implications of this transition for rural residents, urban consumers, and society. Unlike previous studies, our framework focuses on the transition and upgrade of livestock farms as opposed to the crop sector and is more realistic by allowing for the coexistence of smallholders and large farms. Our application focuses on hog farming in China, which is arguably the world’ largest livestock sector. Our results show that the transition to larger hog farms leads to a persistent welfare loss for independent and employed smallholders (rural residents), but the losses are outweighed by larger welfare gains enjoyed by urban consumers. The income effect dominates in the welfare changes of smallholders, who first benefit but then suffer from the transition by working for large farms. Despite the labor efficiency losses faced by large farms, their credit and technology advantages sustainably increase total pork production and lower retail pork prices, thereby enhancing total social welfare. The transition can generate welfare gains for rural residents, urban consumers, and society when smallholders are allowed to exit hog farming. The proposed integrated framework provides a novel theoretical perspective and analytical tool for examining the transition in the agricultural sector. Our framework is characterized by its generality and its ability to capture the dynamics and welfare effects of the transition across various agricultural contexts and regions