Analysis Traditional vs. modern production systems: Price and nonmarket considerations of cacao producers in Northern Ecuador Pilar Useche ⁎, Trent Blare University of Florida, United States abstract article info Article history: Received 10 August 2012 Received in revised form 6 March 2013 Accepted 10 March 2013 Available online 23 May 2013 Keywords: Agroforestry Farm–household model Cacao production Labor productivity Shadow wage Planned biodiversity Many factors besides profit maximization, such as nonmarket ecological and social benefits, influence small- holder households to adopt a specific agricultural production system or sell in a particular market. Thus, dif- ferent analytical techniques are needed that take into consideration more than monetary income to fully capture these additional benefits to better understand the production decisions of smallholder farmers. We build on previous work on the household model and shadow wage estimation to develop a shadow wage for Ecuadorian cacao producers that includes these nonmarket benefits. We found that the shadow wage correctly indicated that, on average, these households would prefer to use an agroforestry production system instead of the more profitable modern system because of the nonmarket benefits received from the former system. Published by Elsevier B.V. 1. Introduction The link between the price premiums paid by affluent consumers in the North and the sustainability of the production practices of farmers in the South has been tightened during the last decades. Increasing awareness of environmental degradation and socioeconomic inequality has impacted consumers throughout the world who desire to confront these challenges through their purchasing behavior. The demand for environmentally and socially differentiated products has led to the cre- ation of organic and fair trade (FT) commodities (LeClair, 2002; Smith, 2009). Indeed, great complementarities of the social and environmental objectives linked to these markets has led to a growing integration of FT and other eco-labels through multiple-certification providers, which verify that a good is fair trade and meets strict environmental standards (de Janvry et al., 2010). In the regions where alternative markets operate, smallholder producers have found renewed incentives to invest their time and effort in using sustainable production systems, which include many traditional farming practices, such as agroforestry systems. These pro- duction systems provide farmers with economic and non-economic benefits, such as food, medicine, and cultural rewards. Yet, the need for cash, education, and other investments benefits the adoption of modern, more productive and genetically uniform, high-yielding crops (Brush et al., 1992; Harlan, 1975). The perspective of selling in alterna- tive markets may provide incentives to move away from modern production systems, yet the smallholders' decision about what type of system to prioritize goes beyond a plain comparison of economic bene- fits. Especially in areas with pervasive market imperfections, household preferences and endowments have a strong influence on production decisions (Benjamin et al., 1993; Carter and Yao, 2002; Eswaran and Kotwal, 1984; Key et al., 2000). While many studies have tried to quantify the impact of participa- tion in alternative markets on farmers' welfare, most of the focus has been on examining the price premium or additional income received by farmers, compared to income in regular markets (Calo and Wise, 2005; de Janvry et al., 2010; Giovannucci et al., 2010; Ronchi, 2006; Ruben et al., 2009; Wollni and Zeller, 2007). These studies ignore the environmental attributes associated with the production of these spe- cialty products and their interaction with farm–households' decisions. A few authors have looked at a wider notion of living standards (Bacon, 2005) and the non-market benefits of participation (Becchetti and Costantino, 2008), but these works have been mostly descriptive and do not integrate their analyses into a broader conceptual frame- work of farmer decision making. In this study, we develop a farm–household model to explain how environmental factors, such as biodiversity, interact with price pre- miums received in specialty markets to impact the allocation of labor of smallholder households across different productive activities. Building on the seminal work of Jacoby (1993) and Skoufias (1994), we develop a link between the marginal benefits that households re- ceive from planned biodiversity (Vandermeer and Perfecto, 1995) and the effective remuneration that their members receive for their work. This leads to a nuanced explanation of why farmers may prefer to work on farm and not participate in the labor market—environmental Ecological Economics 93 (2013) 1–10 ⁎ Corresponding author at: Dept. of Food and Resource Economics, P.O. Box 110240, Gainesville, FL 32611, United States. Tel.: +1 352 294 7665. E-mail address: useche@ufl.edu (P. Useche). 0921-8009/$ – see front matter. Published by Elsevier B.V. http://dx.doi.org/10.1016/j.ecolecon.2013.03.010 Contents lists available at SciVerse ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon