Factor Market Distortions, Agricultural Producer Service and Agricultural Productivity

Small-scale agriculture prevails in developing countries and adds difficulties for the agricultural sector to use modern inputs from the urban region. In practice, raising division among rural area and the development of agricultural producer service sector could solve this problem without transferring the right to management of rural land. This paper employs the general equilibrium approach to investigate how the mitigation of labor and capital distortion influences rural development and agricultural productivity with the existence of the agricultural producer service sector. In the model, the capital could not move into agricultural production directly, instead, capital entries into the agricultural producer service sector and indirectly serves the agricultural production. Our model shows that the mitigation of labor market promotes rural labor migration as well the capital mobility from urban to rural, and expands agricultural output and raises agricultural productivity. However, a reduction of capital market distortion fails to achieve its goal and reduces agricultural output and productivity.