Exogenous shocks to farmers’ consumption, production and labour market decisions are
rarely considered accurately. For farm households, under labour market imperfections,
such decisions are often interlinked. This calls for non-separable agricultural household
models. According to this framework, second-order (or behavioural) effects include a
direct (i.e., supply or demand reactions due to an exogenous shock) and an indirect (i.e.,
supply or demand adjustments to the endogenous variations in the shadow wage
generated by the exogenous shock) component. Under large price changes or following
structural interventions, such as those concerning land redistribution or mechanization
practices, neglecting such second-order effects on consumption and production can bias
the final impact on household welfare. The main objective of this study is thus to develop
a robust and comprehensive tool to evaluate the effect on household welfare of different
agricultural policies in Tanzania and food price changes. A two-stage estimation strategy
is adopted: the shadow price of labour is first estimated and then used to estimate
production and demand systems as well as labour market functions. These models are
subsequently used to simulate the effect on household welfare of a hypothetical 40%
increase in the price of cereals and other crops and a hypothetical 10% increase in the
hectares of arable land and in the use of ox-ploughs. The results are finally compared
with the case in which a separable model is adopted.