Endogeneity, Heterogeneity and Determinants of Inefficiencies in Crop-producing Farmers: Empirical Evidence from Central Highlands of Ethiopia

Abstract

This study estimated transient and persistent inefficiencies distinguished from farm-heterogeneity and endogeneity forEthiopian grain crop-producing farmers for the period 2004 – 2015. The study used Mundlak-adjusted random effect – four error component stochastic frontier (4eCSF) model byextending earlier version of the 4eCSF model to distinguished endogeneity and farm-heterogeneity from time-invariant inefficiency and to explain inefficiencies. The Mundlak-adjusted model is then estimated using multi-step estimation. The estimated average values of persistent, transient and overall efficiencies were 79%, 73% and 58%, respectively indicating there was room for improvement using the present resource and technology. Result from inefficiency effect model reveals sex, family size, number of plots, owing oxen, land quality and rainfall influenced transient inefficiency negatively while age, education, and temperaturevariation influenced positively. Persistent inefficiency was influenced negatively by owing oxen, irrigation, land quality, farm size, population pressure, rainfall and distance to market whereas age and education affected positively. The findings exhibit a low overall technical efficiency of Ethiopian grain crop-farmers is mainly due to the transient part. On the other hand, though the level of persistent inefficiency is lower than that of transient inefficiency, it is still substantial. Hence, these findings are important to initiate government policy options to reduce inefficiency focusing on factors affecting the long-run and short-run inefficiencies distinctly. The current low level of efficiency can be addressed by increasing farmers’ access to education, modern agricultural machineries and input market accesses, improving technologies that promote land conservation (quality) and reduce weather adverse effects and support for female farmers. JEL Classification: C23; C33; D24; O13; Q12; Q18.