Farmers’ long-term investment decisions: a study of Sri Lankan rubber smallholders

Planting and replanting of perennial crops confronts small farmers with a long-term investment decision. In this study, we analyse the behaviour of rubber smallholders in Sri Lanka when faced with a replacement decision. An intertemporal profit maximizing model (maximizing discounted stream of expected future net revenues) predicts behaviour of larger, hired labour using farmers quite well. The model can also be extended successfully to smaller, family farms, when a lower than market wage rate is imputed to family labour to better reflect opportunity cost of labour, and risk considerations are incorporated in relatively simple fashion. The difference between a cash investment and a labour investment is crucial for the poorer family farmers and an appropriate cash subsidy can play a vital role in inducing them to undertake long term investments.