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Smallholder agriculture in developing countries is characterized by low productivity. Improving the productive efficiency of farm households is considered one of the paths to increase productivity and reduce poverty. This study analyzed the poverty reduction effects of improving the technical efficiency of cereal-producing farm households using plot-level data from rural Ethiopia. The effects were also evaluated whether they were heterogeneous relative to the level of crop diversification. Multidimensional Poverty Index (MPI) and stochastic meta-frontier approach were used to estimate the poverty status and the technical efficiency scores, respectively, and the Herfindahl Index (HI) was used to compute crop diversification. The instrumental Tobit Model was specified to estimate the poverty reduction effect of technical efficiency. Our results revealed that the mean technical efficiency of farm households was estimated to be 58%. The poverty estimate results showed that a higher proportion of farm households were multidimensional poor. The incidence of poverty and the mean deprivation score was found to be 57.9% and 44.1%, respectively. Overall, the value of MPI estimated was 31.2%, implying the farm households experienced 31.2% of the total deprivations across all indicators. The HI was 0.51, indicating a moderate degree of crop diversification among farm households. The model results showed that a 10% increase in technical efficiency significantly drives down the household multidimensional poverty by 15.3% at 1% level, keeping other things being constant. Furthermore, ceteris paribus, a 10% increase in technical efficiency significantly reduces household multidimensional poverty by 7.0% and 7.8% at 1% level among moderately diversified and least diversified farm households, respectively. In conclusion, technical efficiency has a higher effect on multidimensional poverty among moderately diversified and least diversified farm households. Therefore, enhancing the productive capacity of farm households among the lower degree of crop diversification to efficiently use production inputs may assist in poverty reduction.

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