Bonn: Forschungsinstitut zur Zukunft der Arbeit (IZA), (Discussion Paper 8525)
This paper addresses the apparent paradox between widespread support of cattle farming by agricultural policy interventions and negative returns to cattle as stressed in recent works. Using a representative panel dataset for Andhra Pradesh, a state in the south of India, we examine average and marginal returns to cattle. One variant of our identification strategy builds on instrumental variable estimation, where the exposure to the National Rural Employment Guarantee Act (NREGA) is used as an instrument for investment in cattle. We find average returns in the order of -2% at the mean, but they vary across the cattle value distribution between negative 35% (in the lowest quintile) and positive 5% (in the highest). In contrast, marginal returns are positive over the entire distribution an d, on average, as high as 13% annually. Both, average and marginal returns vary considerably not only across scale, but also across cattle breed and individual animal value. Our results suggest that cattle
farming is associated with sizable non-convexities in the production technology and that substantial economies of scale as well a high upfront expenses of acquiring high productivity animals might trap poorer households in low-productivity asset levels.