Production Choices of Farm Households: Institutional and Behaviourial Aspects in Economic Theory

This paper reviews the main theoretical and empirical contributions analysing production choices of farm households in the developing countries, where the markets are imperfect and incomplete. Recent developments in the micro-economic literature have highlighted the existence of a trade-off between the income risk and expected returns to investments for households taking production decisions in imperfect and incomplete markets. In particular, farm households tend to invest in low-risk, low-return activities; and in some cases, poorly endowed, risk-averse farm households might even be caught in a poverty-trap, as they are unable to accumulate savings and make profitable investments to escape poverty.