Modeling Farm Households’ Price Responses in the Presence of Transaction Costs and Heterogeneity in Labor Markets Christian H.C.A. Henning and Arne Henningsen Department of Agricultural Economics, University of Kiel Olshausenstr. 40, 24098 Kiel, Germany, http://www.uni-kiel.de/agrarpol/ chenning@agric-econ.uni-kiel.de, ahenningsen@agric-econ.uni-kiel.de This is an electronic version of an Article published in American Journal of Agricultural Economics , 89(3), p. 665-681. c 2007 American Agricultural Economics Association. The final version is available on http://www.blackwell-synergy.com/loi/AJAE Abstract We develop a farm household model to analyze price responses of farm households. This model incorporates various types of transaction costs as well as labor heterogeneity. Non- proportional variable transaction costs or labor heterogeneity imply that production and consumption decisions become non-separable, even when the household buys or sells labor. An empirical model is estimated using data from Mid-West Poland. The results show that non-proportional variable transaction costs and labor heterogeneity significantly influence household behavior. Not all price elasticities, however, change significantly if these are neglected. Key words: farm household model, market imperfection, rural labor markets, selectivity, transaction costs JEL classification: Q12, J22, D43, C51 Christian H.C.A. Henning is professor and Arne Henningsen is assistant professor, Department of Agricultural Economics, University of Kiel, Germany. Senior authorship is shared. The authors thank Wade Brorsen and three anonymous reviewers for their very helpful comments and suggestions. We also thank Awudu Abdulai, Uwe Latacz-Lohmann, and Jerzy Michalek for very helpful comments. Any remaining errors are the authors’. 1