Specialization and coevolution of agricultural markets

There are two primary sources of efficiency losses in rural labor institutions: (a) loss due to shirking, which rises with the breakdown of full information; and (b) loss due to lack of specialization. The summation of these two is defined as excess burden and the efficient contract is the one that minimizes it. The traditional village economy is characterized by low shirking cost due to full information and high cost of production due to lack of specialization. As a result, the personal mode of exchange is predominant starting from exchange between family members. With the development of transportation infrastructure, labor mobility rises, leading to the emergence of the hired labor market. Due to the lack of information about hired laborers, the potential for shirking rises. At the same time, the potential for specialization rises and unspecialized wage workers are replaced by piece-rate workers specializing in particular tasks. The piece-rate contract emerges as a mechanism that minimizes excess burden. The evolution of agricultural labor contracts can therefore be understood as a continuum of the minimum excess burden points of successive institutions. As the investment in physical, legal, and relational infrastructures permits a further reduction in transaction costs, specialization and the extent of agricultural output and factor markets evolve. In summary, the labor market evolves from autarky to communal production to the agricultural contracts and finally to the familiar neoclassical market economy. The empirical evidence collected from the province of Laguna in the Philippines provides consistent support for the theory. Four kinds of contracts were observed, namely, pure family, time-rates, piece-rates, and mixed contracts. The piece-rate contract is observed to be predominant, especially in villages near the city center (Manila). The use of family labor has also declined over the survey years. The econometric tests also support the theory and suggest that transaction cost is one of the main driving forces in shaping labor institutions. (Author abstract)