ABSTRACT
The results in Chapter 6 , of a production function based test for the heterogeneity of family and hired labour as farm inputs in the tarai region of Nepal, indicated that family and hired labour are perfect substitutes in crop production but with differing productivity. This finding of a linear composite form of labour heterogeneity has important implications for the appropriate methodology as well as model specification in estimating the labour supply component of the farm household model. As discussed in Chapter 3, the methodological implication of a linear form of labour heterogeneity is that the farm household model is still recursive in its production and consumption decisions. The constant efficiency difference between hired and family labour, denoted by 0 , leads to a model structure wherein the effective wage rates faced by household members will differ according to the labour market exposure of the household in the hired labour market - i.e. whether the household is a net buyer or net seller of labour. The efficiency difference, however, is independent of the levels of the labour inputs, and of the other inputs used on the farm (because the production function was shown to be separable in the labour inputs). Hence, the effective wage rate faced by family labour when applied to the farm is still parametrically given to the farm household. Consequently, the labour supply estimation can be carried out separately from the production side of the model, but with the necessary adjustments to the observed market wage rates for the difference in productivity represented by 0 .
