ABSTRACT
This chapter presents the results of a production function based procedure that tests for heterogeneity between family and hired labour inputs in crop production in the tarai region of Nepal. The production function regression results also serve as the first step of the sequential estimation strategy outlined in Chapter 4 for estimating a farm household model that allows for labour heterogeneity. The parameters of the production function that describe the specific nature of the labour heterogeneity will be used to generate the unobservable variables for the labour supply regressions in the second step (Chapter 7). Unlike the conventional model with “generated regressors” where the first step is used only to derive the unobservable variables for the second step, the estimated production function parameters presented in this chapter are of independent interest. These parameters describe the production component of the farm household model, irrespective of the nature of the heterogeneity detected. They determine the set of factor demand elasticities and the elasticities of input substitution that reflect the production side decision making of the farm household.
