Humboldt-Universität zu Berlin - Quarterly Journal of International Agriculture

Quarterly Journal of International Agriculture No. 3/07

Fall in technical efficiency of small farm households in the post reform period

Beyene Tadesse Ferenji
Addis Ababa University, Ethiopia, and

Franz Heidhues
University of Hohenheim, Stuttgart, Germany


A market based economic system is expected to lead to a more efficient production by providing producers with incentives to realize input-output combinations close to the production frontier. However, technical efficiencies could remain constant or even decline if only the best farmers implement rapid technological change and a large numbers of farmers are left behind. Changes in motivation and ability of farmers to use the best techniques and innovations in the production process were examined using a random coefficient framework. A stochastic Cobb-Douglas production function that incorporates time-varying inefficiency effects and technological changes was applied to Ethiopian farm-households based on panel data collected at intervals of years (1994, 1997, 1999 and 2001) in maize production.

Despite the fact that farmers in general increased the use of chemical fertilizer and improved seeds, the study results show that they became gradually more inefficient in the period under investigation. The technical efficiency of farmers declined by a mean of 15%, which resulted in a loss of about 24% of the potential output at the end of the study period. This clearly demonstrates that market liberalization alone does not always guarantee more efficient production. Major limiting factors were identified by applying the Technical Inefficiency Effects model. Decline in efficiency was generally attributed to the fact that changes of institutions and farmers’ managerial skills were not in parallel with improvements in maize production technology. Whereas household education, access to credit and size of livestock owned positively and significantly influenced the technical efficiency of farmers, unreliability of the maize price, distance from the main road (remoteness) and arising household’s dependency ratio negatively affected it.

Keywords: institutional change, market liberalization, technological change, technical efficiency

JEL: Q160

Vol. 46 (2007), No. 3: 241-261