Off-farm income and technical efficiency of smallholder farmers in Ethiopia : a stochastic frontier analysis

Abstract: As in most developing countries, agricultural production in Ethiopia is dominated by subsistence-based smallholder farmers, whose production and incomes from the sector are constrained by socio-economic, institutional, resource and environmental factors. These factors generally attribute for lower productivity of the sector, which in turn forces farmers to participate in off-farm activities in order to diversify their sources of income. However, participation in off-farm activities has direct and indirect influence on agricultural production. The purpose of this study is to examine the impact of off-farm income on technical efficiency and farm output of smallholders in Ethiopia. The study used data from the 2009 Ethiopian rural household survey conducted by International Food Policy Research Institute. A Stochastic frontier model is used to address the objectives of the research. Results confirm the appropriateness of the Cobb-Douglas form of the production function over the Translog and Stochastic Frontier Analysis over the Ordinary Least Squares. An instrumental variable regression framework is used to address the endogeneity of off-farm income in determining technical efficiency and farm output of farmers. The estimation results show that size of farm land, household size, off-farm income, gender and education of the household head are the most significant variables determining the value of farm output. The average technical efficiency of farmers is only 53 percent, implying the existence of wider scope for improvement of their efficiency. In addition, maximum likelihood estimation result indicates that household size, education of the head, soil conservation, extension services and off-farm income are major factors for differences in technical efficiency among farmers. Particularly, the effect of off-farm income on farm output and technical efficiency is positive showing the spillover effects of income from off-farm activities on farm productions. Hence, policy makers should focus on increasing opportunities and access of off-farm activities to enhance production, productivity and overall wellbeing of the rural societies.