Social Networks, Financial Markets, and Household Organization in a Developing Economy

Yale University, New Haven CT

Investigators

Abstract

The proposed research uses data collected by the PI in Ghana to examine social networks, financial markets and household organization in a rural economy characterized by rapid technological innovation and stress on land resources. Over a two year period, we collected detailed plot level data on inputs, outputs, land tenure and soil chemistry, information on learning interactions, financial flows and labor transactions between individuals in the sample, plot level GIS data, and individual level data on economic activities (including panel data on consumption, non-farm income and time allocation) and socioeconomic background. The proposed research consists of three major components. The first is an investigation of social learning and network formation. In the survey region, the farming system is rapidly changing from a cassava-maize intercrop to production of pineapples for export as fresh fruit. This shift involves a set of new technologies including a transformation of the fallow system that had been used to maintain soil fertility, the use of new output markets and, particularly, intensive use of agricultural chemicals where none had been used in the previous farming system. I propose a method for identifying the transmission through the social network of information derived from farmers' experiments with these new chemicals. Preliminary results provide evidence that the level of a farmer's use of the new chemicals is sensitive to the outcomes of the experiments with these chemicals by others to whom the farmer is directly or indirectly connected in the network. Given these results, I propose modeling the process of network formation in these villages. The hypothesis to be tested is that an individual is more likely to set up network connections with others who are likely to posses information valuable to that individual. Second, pineapple cultivation is both much more profitable and much more costly than the cultivation of alternative crops. This raises the possibility that the process of adoption is influenced by the characteristics of financial markets in the study area. Preliminary evidence is that variation in wealth (treated as endogenous) is an important determinant of pineapple cultivation. I propose to use the data on financial flows, along with the expenditure, assets and time use panel data to explore the hypothesis that capital constraints influence adoption decisions. Farmers simultaneously make decisions regarding the management of soil fertility. Since this is an intertemporal allocation problem it is intimately related to each individual's position vis-a-vis capital markets. In informal interviews, some farmers stated that they were drawing down soil fertility in order to expand production. The second goal is to examine decision making with respect to soil fertility (using the panel data on soil chemistry) and to relate this to adoption decisions and to the financial markets available in the study area. Finally, there is evidence in Ghana that the mechanism of intrahousehold resource allocation corresponds to neither the unitary household model nor the more general model of a collective household. In particular, the allocation of risk within households is not Pareto efficient. There is evidence of important information asymmetries between spouses. This aspect of the research program will examine the hypothesis that the endogenous structure of production relations within the household is a determinant of intrahousehold information flows and hence intrahousehold allocation decisions.