Rural Household Response to Shocks in Ethiopia. A Household Modelling Approach

Evidence From Ada’a Woreda Crop Mix

Examination Thesis, 2016

107 Pages, Grade: 4.0/ EXCELLENT











1.1. Background
1.2 Problem Statement
1.3. Objectives of the Study
1.4. Research Questions
1.5. Significance
1.6. Scope of the study
1.7. organization of the study

2.1. Conceptual Discussion and Definitions
2.2. Theoretical literature review
2.2.1. Household Models
2.2.2. Agricultural Household Models
2.2.3. Linkages of Production, Consumption and Leisure Time
2.2.4. Importance of Crop Mix
2.2.5. Measurement of Intercropping
2.3. Empirical Literature review
2.3.1. Empires on Household Model
2.3.2. Empires on Crop Mix, Profitability and Resource Use Efficiency
2.4. Conceptual Framework

3.1. Research Design
3.2. Research Approach
3.3. Population and Sample
3.3.1. Sampling Technique
3.4. Source of Data
3.5. Analysis/ Treatment of the Data
3.6. Model Specification and Estimation
3.7. Framework of the Model
Figure 2: Framework of the Model

4.1. General Description of the Village
4.1.1. Socio-Economic Characteristics of Households
4.1.2. Production and consumption and market purchase of the village
4.1.3. Purchased Inputs of the Household in the Village
4.1.4. Allocation of land and animal resource of the village
4.1.5. Allocation of Labor of the village
4.1.6. Other Food Consumptions of the Household
4.1.7. Other Source of Income and Expense of the Household
4.2. Analysis and Discussion
4.2.1. Initial Optimal Values Initial optimal production, consumption and market surplus Factor Input Distribution of Each Crop
4.2.2. Scenario Development and Shocks Output price increase by 10% Impact of output price increase on factor distribution of the household. Factor price increase by 10 % Both output price and factor price increase by 10%
4.2.3. Technology level increases by 20% Impact of a 20% increase in technology of teff on production,
consumption and market surplus Factors distribution of the household when the technology of teff increases by 20% Factors distribution of the household when the technology of wheat increases by 20% Impact of a 20% increase in technology of Chickpea on production, consumption and market surplus Factors distribution of the household when the technology of Chickpea increases by 20%
4.2.4. Welfare Maximization of the Household

5.1. Conclusions




This study is dedicated to my parents


“All things were made by him; and without him was not anything made that was made.” John 1:3

After an intensive period of nine months, today is the day: writing this note of thanks is the finishing touch on my thesis. It has been a period of intense learning for me, not only in the academic area, but also on a personal level. Writing this thesis has had a big impact on me. I would like to reflect on the people who have supported and helped me so much throughout this period.

Foremost, I would like to express my sincere gratitude to my advisor, Solomon Tsehay (PHD), for the continuous support on my thesis study, for his patience, motivation, enthusiasm, and immense knowledge. His door to office was always open whenever I ran into a trouble spot or had a question about my research or writing. He consistently allowed this paper to be my own work, and steered me in the right direction whenever he thought I needed it.

I would also like to acknowledge Zerayehu Sime Eshete (PHD) as the second reader of this thesis, and I am gratefully indebted to his for his very valuable comments, selfless support and encouragement during the course of the thesis.

My next gratitude goes to the people who helped me during the data collection, Ato Nigussie Girma, Tewodros Meles and my Mom also my friend Omer Mohammed for his continuous support in openhanded me with materials regarding the study.

Finally, I take this opportunity to express my very profound gratefulness to my beloved parents for their love and unfailing support and continuous encouragement throughout the years of study. This accomplishment would not have been possible without them. Thank you.


Table 1: socio economic characteristics of households

Table 2: Product and productivity of crops in the village

Table 3: purchased inputs of the Household

Table 4: Allocation of Land animal resource of the village

Table 5: Allocation of Labor (adult equivalent)

Table 6: Other food consumptions

Table 7: Other source of income and Expense of the household

Table 8 Production and Consumption

Table 9 Factor input distribution of each crop

Table 11: Output price increase by 10%

Table 12: Effect of an increase in output price on factor distribution

Table 13: Effect of an increase in factor price on the village economy

Table 14: Effect of an increase in factor price on the distribution of factors 53

Table 15: The net effect of an increase in factor and output price on the

production, consumption and surplus of the households

Table 16: The net effect of an increase in factor and output price on distribution of factor inputs

Table 17: Impact of a 20% increase in technology of teff on production, consumption surplus of the entire agricultural production

Table 18: Impact of a 20% increase in technology of teff on the distribution of factors

Table 19: Impact of a 20% increase in technology of wheat on production, consumption surplus of the entire agricultural production 58

Table 20: Impact of a 20% increase in technology of wheat on distribution of the Factors

Table 21: Impact of a 20% increase in technology of chickpea on production, consumption surplus of the entire agricultural production... 60

Table 22: Impact of a 20% increase in technology of chickpea on distribution of the factors

Table 24: Welfare maximization of the household


Appendix I: A 20% increase in technology of lentil on production distribution

Appendix II: A 20% increase in technology of lentil on factor distribution

Appendix III: A 20% increase in technology of bean on production distribution

Appendix IV: A 20% increase in technology of bean on factor distribution

Appendix V: A 20% increase in technology of barley on production distribution

Appendix VI: A 20% increase in technology of barley on factor distribution

Appendix VII: A 20% increase in technology of maize on production distribution

Appendix VIII: A 20% increase in technology of maize on factor distribution

Appendix IX: Model

Appendix X Questionnaire

Appendix XI Amharic version of the questionnaire


Abbildung in dieser Leseprobe nicht enthalten


This study assesses the response of rural households to output and input prices as well as technological changes in mixed crop production in Ethiopia, in case of Ada’a woreda selecting a sample size of 100 households using a non separable household modeling approach. Cobb Douglas function is used for the production and utility function and major constraints like land, labor, seed and fertilizer are considered in order to find the optimum values that would enable household maximize their utility. The most widely produced 7 crops in the village were selected (teff, wheat, chickpea, lentil, bean, barley, maize). The optimal value exposes that mono cropping (teff production) is better than multiple cropping to maximize utility. Output price, factor price and technology shocks were introduced in order to see how the households respond and how and to what extent that the production, consumption and welfare of households are changed. The finding of the study reveals that households tend to leave the agricultural sector if all input prices are increased by 10% and this is the case where the households face minimum welfare level. When output prices are increased by the same figure, farmers allocate all of their labor in the agricultural sector. A technological improvement by 20% on teff enables households to fully engage in agricultural activities and secure the highest utility compared to other shocks while other crops are not responsive to technological change. This implies that stakeholders should focus to improve the method ofproduction of teff in the village. In addition, the government should get involved in such a way that factor prices shouldn't be increased beyond a certain point.

Key words:- Crop mix; farm household; cobb duglas function; non separable agricultural household; NLP; GAMS


1.1. Background

Ethiopia has experienced three main political regime changes in the last five decades along with an unremitting political instability and war. In the imperial regime (1940­1974), a mixture of feudalism and capitalism was the main framework of the economy. The government also attempted to implement successive five year planning (1957-1974) that heavily engaged in industrialization. However, they failed to achieve what is expected due to the fact that agriculture received less attention (Chole, 1992). Amidst this performance, the socialist government (1974-1991) seized power and nationalized all the emerging private industries. The government firmly controlled all economic activities and marginalized private investors from main activities. However, both agriculture and industry grew at negligible rates. The real per capita GDP declined by around 1.4 percent annually, while the foreign currency reserve almost dwindled to 10 days of import coverage at the end of the reign of socialist government (MEDaC, 1999).

The socialist regime was toppled out in 1991 and the government has subsequently undertaken a series economic reform program of WB and IMF and designed a policy of Agricultural Development Led Industrialization-ADLI (MOFED, 1998). The objective of ADLI is to enhance sectoral interdependence mainly between agriculture and industry and then secure the overall growth in Ethiopian economy.

Agriculture is the base of the economy of most developing Africa. The share of the sector for the GDP of the continent is 32%. Even if the continent has experienced continuous agricultural growth during the past few years (since 2000), the progress is not yet fast enough. Agricultural GDP growth in sub Saharan Africa has accelerated from 2.3 percent per year in the 1980s to 3.8 percent per year from 2000 to 2005 (world bank). This is due to the fact that, much of the growth has come from area expansion rather than increases in land productivity which is the case for most of the countries. And if the existing situation continues, there will not be any productivity increment in the sector with the current population growth. Fei - Ranis (1964)

Agriculture is the mainstay of the economy, where nearly 85% of the populations are directly dependent on agriculture and livestock for their livelihood (MoFED, 2002, p. 41). This is evidenced by the fact that it comprises 39.9% of gross domestic product (GDP), 90% of exports and employs about 82% of the labor force The sector provides raw materials for more than 70% of the country’s industries (NBE, 2013/14).

The sector is with much more importance. This is supported by a study made by Diao and Hazell (2010,) who confirmed that an agricultural stimulated growth of one per cent annual increase in Ethiopia’s per capita GDP leads to a 1.7 per cent reduction in the poverty rate per year. On the other hand, if the same increase in per capita GDP is caused by non-agriculture, its impact on poverty reduction is only 0.7 per cent. This comprises that the sector is with much more importance. According to the national accounts, the agricultural sector in the country consists of crop, livestock, fishery and forestry sub­sectors. Crop production takes the largest share, accounting for more than 60% of the agricultural GDP followed by livestock, which contributes more than 20% of the agricultural GDP. The contributions of forestry, hunting and fishing do not exceed 10% (Mulat et al., 2004).

Despite Ethiopia is a center of several crops like teff, wheat, maize, sorghum and barely accounted for 86% of the cereal production and covered 80% of the total farmland under small-householder, most agricultural producers of the country are subsistence farmers and small household broken into several plots and contributing 85% of employment with a total area of about 1.13million km and about 51.3million hectares of arable land and nearly 55% of all smallholder farmers operate on one hectare or less. The land tilled by the Ethiopian small-scale farmer accounts for 95% of the total area under agricultural use and these farmers are responsible more than 90% of the total agricultural output. The small-scale farmers produce 94% of the food crops (Medic, 1999: 145).

Mulat et al. (2004), Girma (2002) and Belaineh (2003) argued that it has a significant share of the economy, it is characterized by poor performance due to recurrent drought, unreliable rainfall, land degradation, rapid population growth, scarcity of land, holding small plot of land, crop and livestock pests and diseases, scarcity of animal feed, lack of improved and suitable technologies and poor marketing and service infrastructure. As explained by Jordan et al. (2011) the opportunities and constraints facing Ethiopian agriculture are strongly influenced by conditions which vary across geographical space. These conditions include basic agricultural production potentials, access to input and output markets, and local population densities which represent both labor availability and local demand for food.

There are also endogenous constraints for its growing of productivity, which are determined by the development of the country. These include low availability of improved or hybrid seed, lack of seed multiplication capacity, low profitability and efficiency of fertilizer use due to the lack of complimentary improved practices and seed, and lack of irrigation and water constraints. In addition, lack of transport infrastructure and market access decreases the profitability of adopting improved practices (Kate & Leigh, 2010).

To meet the challenges of inefficient agriculture as well as the growing and changing needs of domestic population the government of Ethiopia has tried to improve the performance of agriculture by planning and implementing different strategies. Among those, one is cropped mix to enhance productivity and cultivate high value crops. If carried out appropriately, crop mix can be used as a tool to augment farm income, generate employment, alleviate poverty and conserve precious soil and water resources. For instance, Studies by Pingali and Rosegrant (1995), and Ramesh Chand (1996) support this meeting the challenges of a globalizing market in agriculture as well as the growing and changing needs of the population, many Countries in South East Asia have undertaken crop mix to enhance productivity and cultivate positive impact of crop mix high value. These days, especially in LDCs, concerns about long term sustainability of intensive, consistent system have raised interest in more complex mechanism that mixes crops with other productive components. Future sustainable agricultural growth will require a greater emphasis on productivity growth, since suitable area for new cultivation declines from time to time with the rapid growth in population comes to deforestation and climate change (IFPRI, 2012).

Therefore, the purpose of the study is to identify the optimum combination of crop mix in maximizing the profitability of the farm households using the agricultural household model in the context of enhancing the level of agricultural development on the basis of optimization. To do so, Ada’a Woreda, the area found in Debre Zeit, is selected for conducting as a case study.

1.2. Problem Statement

Ethiopia is one of the poorest countries in the world. Famine attacks the country almost in every decade. The country is characterized by large food self-sufficiency gap at national level and food insecurity at the household level. People live in extreme poverty in the midst of plenty fertile land and relatively preserved environment. Due to the fact that a predominant portion of agricultural production takes place at the subsistence level, the government focuses mainly on agricultural investment on the small holders. Together, these smallholders produce a yearly average of 12 million tons of cereals, which is 68 percent of total agricultural production. Averaged over the period 2004/05-2007/08 cereals were grown on 73.4 percent of the total area cultivated, by a total of 11.2 million farmers. Ethiopian small holders are producing multiple of crops at the same time. In addition, the average land holding of Ethiopian farmers is 1.37 hectare. (Diao et al, 2005)

This calls for the implementation of land-saving techniques and technologies, i.e. increasing crop yields per unit of land. The main land-saving techniques appropriate to subsistence agriculture are: improved crop varieties and knowing the optimum mix of crop to increase productivity which is the most effective and least costly mechanisms. Problems normally faced by farmers include what to plant, how much to plant and when to plant.

Even though crop mix has enormous benefits, farmers in Ethiopia in general and in Ada’a woreda in particular don’t know the optimum level of crops to bring the best outcome and maximize their gain and utility. As a result, the optimal allocation of resources is not yet identified in order to boost up the farmers’ income by maximizing their utility. Though they have an experience of mixing crops, farmers do not know exactly the specification of the crop mix maximization problem given the constraints they have in a bid to maximizing their utility. As a result, they are not familiar with the optimal bundle of crops that is supposed to be mixed in the production process. Households would be vulnerable to both output and input prices shocks when they produce multiple crops at the same time. In addition, opting the appropriate technology for each cereal makes it a daunting challenge for policy makers. Price of crops as well as basic inputs changes across time that requires appropriate response of household by changing their crops mix.

Alison Kay Bittinger (2010) also examined crop diversification and technology adoption decisions made by the households using simultaneous equation model. His finding indicated that Ethiopian smallholders do react to changes in the level of market access by altering their product mix. Mixed Crop production under small-scale system is a risk management strategy and an important step for transition from subsistence to commercial agriculture.

Reviewing most notable empirics and findings, there are some strong research gaps that are supposed to be filled by this study. Among many, several studies have been carried out regarding crop mix efficiency; most of them are at community or regional level, by analyzing consumption and production separately using secondary data; which is an inappropriate estimation in LDCs in general and in Ethiopia in particular. Besides, none of them apply the agricultural household model using GAMS software. Almost all consider farmers as if they make a separate economic decision as producer and as a consumer in a single model of addressing household problems. Besides, agricultural households allocate their labor in ranges of activities. So how they allocate their labor and other production factors in a way that enables them maximize their utility? All these assessments require a rigorous modeling in order to fill this gap, a localized study at the household unit of analysis is crucial using the agricultural household model via GAMS. Moreover, consideration of the inseparable nature of decisions received heavy attention in this study in order to relate farm production and household consumption. Hence, this study will consider households that consume what they produce and decisions are simultaneously or jointly determined, which is not the case of the standard microeconomic theory in which the production and consumption decisions are separable. This study will use the household model in Ada’a Woreda, specifically selected study area by assessing how crop mixing and farm household utility will be maximized. And more of that how the households respond to different external shocks like exogenous price, factor input price and change in technology.

1.3. Objectives of the Study

The principal objective in any crop mix problem is to search for an optimal combination of crops amongst those considered such that it maximizes the total overall contributions while satisfying a system of constraints such as land availability, capital and others. In this regard the main objective of the study is to examine and measure the rural farm household utility linked with crop mixing in Ethiopia, the case of Ada’a woreda.

The specific objectives of the study are presented as follows:

- To measure the change in price of agricultural outputs on the level of utility of the households.
- To measure the change in factor input price on utility of the household .
- To examin the effect of the change in technology on agricultural production setup of the household.

1.4. Research questions

1. What is the optimum level for the household to maximize utility under different constraints by applying crop mix?
2. How the exogenous shock, the change in price of output affects the household’s decision in mixing the crops in order to maximize their utility?
3. How the change in price of factors and the change in technology affect the household’s decision in mixing the crops to still maximize their profit?

1.5. Significance

This research focuses on one of the major share contributor of the Ethiopian economy, the agricultural sector and mainly on how the large share of the population engaged in small scale farming maximizes their profits utility using one of the mechanisms called crop mixing. It intends to have evidence based confirmation of facts in which how the households respond to different shocks of the economy and gives a clear insight for the government and concerned policy makers to prescribe and implement appropriate policies.

1.6. Scope of the study

The scope of the study focuses on the optimum level of utility maximization of the household farmers and the effect of change in different external shocks on the decision making of the household in Ada’a Woreda. The place is selected due to the fact that a large percent of the population (78%) is engaged in agriculture, there is a different crop production in the area and it is a nearby area of Addis Ababa for the simplicity of the data collection.

1.7. organization of the study

This paper has five chapters. Apart from the introduction, the second chapter presents the review of literature, both theoretical review and empirical evidences. The third chapter discusses the whole methodology of the research, approaches used, specification and estimation of the model applied to the study. The fourth chapter focuses on the description, interpretation and analysis of the collected data. Finally, the last chapter gives conclusion and policy recommendations.


2.1. Conceptual Discussion and Definitions

In the history of growth, there has been a very severe contention about identifying the driving force of economic growth at the macro and micro level. In the tradition growth theory growth was assumed to be derived by the accumulation factors and countries at different level of development tends to converge at the steady state level in the long run. This idea had been dominating the thinking of economics long time. The factor accumulation induces more attention towards industrial development. In particular, in the 1950s and 1960s, import substitution strategy is worth mentioning in this regards. However, some countries caused inefficiency to industries and delayed transformation.

The dual-sector growth model, then after, acknowledges the strong interdependence between agriculture and industry. Lewis (1954), Jorgenson (1961), Dixit (1968), and Kelly et al. (1972) emphasized the dual sector growth model; though the process of industrialization assumed to continue until the modern sectors absorb the factor accumulation of all surplus rural labor. However, Fei-Ranis (1964) gave more emphasis on the contribution of agriculture for transformation and growth, arguing that growth in the agriculture can restrain growth in the industrial sector.

However, the subsequent economists argue that factor accumulation is heavily associated with diminishing returns to scale and tends to cause temporary economic growth only. Therefore, they forwarded a theory of endogenous growth on the basis of taking saving and technology as endogenously determined within a system of growth equations. This highly attributed to total factor productivity and an increasing return to scale of technology consisting of allocative efficiency, technical efficiency, technology and economies of scale in general. However, both this exogenous and endogenous growth models do fully able to explain the myth of securing growth in most developing countries.

Given this umbrella, there are three most common arguments against agriculture in the heart of development economics. The dualistic model argument states the vitality of the industrial sector and the secondary role of the agricultural sector in the development processes. The terms of trade argument also suggest that over time ‘terms of trade’ would turn against countries that export primary products and import manufactured goods. The relative importance argument provides a justification of the relative importance of industry sectors over agriculture and it is believed that agriculture is unimportant and that it does not require resources or a favorable policy environment-because its relative share of the economy declines.

After hot debates, the relevance of agriculture has received more attention on the basis of theories and empires. Timmer (1998) in this regards argues that major attention is needed to induce agricultural transformation if an industrial revolution is to take place successfully. Agricultural development is now seen as an important part of any development strategy in the framework of sectoral linkages: factor market linkages, product market linkages (food, raw material linkages), demand linkages for product of non-agricultural sector, linkages in foreign exchange earnings and non-market linkages. Empirically, although agriculture employs the majority of the developing countries labor force, it accounts for a much lower share of total output and foreign currency earnings. Taking the experience of pro-poor growth strategy, it is believed that agriculture plays a pivotal role in the early stages of pro-poor growth and contributes beyond its direct contribution to growth through large size of sectoral linkages and generates positive externalities from assuring food security and reducing food prices. This also enables the rural nonfarm economy increases initially led by linkages to agricultural growth, but later tied increasingly to urban industrialization. It helps to reduce income disparities (Diao et al., 2005).

Therefore, it seems possible to characterize the literature on agricultural development into the following general approaches or agricultural development theories or models: expanding “extensive margin” (resource exploitation model), expanding “intensive margin” (resource conservation model), the location model (the urban -industrial impact model), diffusion model (model of technology-transfer), high-payoff input model, and induced innovation model. Agriculture is linked to every aspect of a developing country. A change in a policy of the sector will affect not only the production of the sector but also consumption and labor supply.

One of the most widely used practices of developing agricultural sector is by using the household models at the micro level that enable to capture the effect of mixed crop in agriculture is a household model, which is an agricultural household model.

The following part of the literature tries to define the basic jargon words.

Most commonly, a household can be defined in either two ways. The first definition is that a household is a one person household that is a person who makes provision for his own living without combining with any other person to form part of a multi­person household. In other way, it is a multi-person household, that is, a group of two or more persons who live together and make common provisions for food and other essentials of living. The persons in the group may pool their incomes and have a common budget to a greater or lesser extent. They may be related or unrelated persons or a combination of both. These persons are taken as members of the household. A household consists of one or more people who live in the same dwelling and also share at meals or living accommodation, and may consist of a single family or some other grouping of people. A single dwelling will be considered to contain multiple households if either meals or living space is not shared.

- Agricultural Household: a household is considered an agricultural household when at least one member of the household is engaged in growing crops and/or raising livestock in private or in combination with others.

Crop: - Cultivated plants or agricultural produce of the ground. It includes cereals, pulses, oilseeds, vegetables, root crops, fruits, coffee, Enset, Chat, hops, sugarcane, cotton, tobacco, etc produced for food, making drinks, stimulation and making fabrics or clothing.

- Crop production: - the process of growing and harvesting of the above crops for own consumption and/or sale.

- Crop yield: - The measure of grains or seeds generated from a unit of land expressed as kilograms per hectare. It is also called agricultural output.

- Temporary/Annual Crops: - Annual/temporary crops are crops, which are grown in less than a year’s time, sometimes only a few months with an objective to sow or replant again for additional production following the current harvest. Continuously grown crops planted in rotation are also considered as temporary crops since each is harvested and destroyed by ploughing in preparation for each successive crop.

Permanent (Perennial) Crops: - Crops, which are grown and occupy land for a long period of time, not requiring replanting for several years after each harvest, are considered as permanent crops. All fruit trees (i.e. oranges, mandarin, bananas, etc.) and trees for beverages (i.e. coffee, tea, hops (Gesho), etc.) are considered permanent crops, but meadows and pastures are excluded.

Meher (Main) Season Crop: - any temporary crop harvested between the months of Meskerm (September) and Yekatit (February) is considered as a Meher season crop.

- Belg Season Crop: - any temporary crop harvested between the months of Megabit (March) and Pagume (August) is considered to be Belg Season Crop.

Mixed cropping: - it's also known as inter-cropping or co-cultivation is a type of agriculture that involves planting two or more of plants simultaneously in the same field during a growing season (Ofori and Stern 1987). Andrews and Kassam (1976) categorize intercropping into four principal types:

1. Mixed intercropping: - growing two or more crops simultaneously with no distinct row arrangement;
2. Row intercropping: - growing two or more crops simultaneously with at least one planted in rows;
3. Strip intercropping: - growing two or more crops simultaneously in different strips wide enough to permit independent cultivation, but narrow enough for the crops to interact agronomically;
4. Relay intercropping: - growing two or more crops in relay, but with the growth cycles overlapping to some degree.

In general, the theory is that planting multiple crops at once will allow the crops to work together. Possible benefits of mixed cropping are to balance input and outgo of soil nutrients, to keep down weeds and insect pests, to resist climate extremes (wet, dry, hot, cold), to suppress plant diseases, to increase overall productivity and to use scarce resources to the fullest degree (Jolayemi and Olaomi, 1995). The primary reason for prehistoric multi-cropping probably had more to do with the needs of the farmer's family, rather than any recognition that mixed cropping was a good idea.

Classic Mixed Cropping: Three Sisters: - The classic example of mixed cropping is that of the American "three sisters", maize, beans, and cucurbits (squash and pumpkins). These three plants, domesticated at different times, were together an important component of Native American agriculture, historically documented by the Seneca and Iroquois, and probably beginning sometime after 1000 AD. All three seeds are planted in the same hole. The maize provides a stalk for the beans to climb on, the beans are nutrient-rich to offset that taken out by the maize, and the squash grows low to the ground to keep weeds down and water from evaporating from the soil in the heat (Daellenbach, G.C. et al. 2005).

Modern Mixed Cropping: - agronomists studying mixed crops have had mixed results determining if yield differences can be achieved with mixed versus monoculture crops. If a combination of say, wheat and chickpeas works in one part of the world, it might not work in another. But, overall it appears that measurably good effects result, when the right combinations of crops are cropped together (Horrocks, M., et al. 2004).

2.2. Theoretical literature review

2.2.1. Household Models

The household model is worth mentioning in the heart of micro aspects of development economics and considers the micro foundation of macro agricultural development by specifying the optimal decision of households given the constraints they have in order to maximize their objective function. Household-farm models are also a very useful tool to examine how household-specific economic behavior in general and transaction costs in particular response to the change in exogenous policy and market changes in rural areas.

Households in several developing countries sustain their livelihood through producing goods and service, mainly agricultural products, by exploiting household labor as the main factors of production. By selling their output in the market, they maximize their profit and income given the constraint function. On the same pattern, they partly consume some portion of their own products. This peculiarly leads to households to be a producer and consumer, unlike the traditional microeconomic theories. They make simultaneous decisions about production and consumption. Note that a production decision consists of the decision of output level, the demand for factors, and the choice of technology and consumption also incorporates the decision regarding labor supply and commodity demand. Such a mixture of the economics of households and firms at a time is typically a characteristic of most households in developing countries. The issue of separability and non separability is a point of departure between microeconomics and household economics. Separability is the case where the consumption, production and labor decisions are made separately, which is the standard micro economic theory. The case of non separability is where the household’s production, consumption and labor decisions are simultaneously or jointly determined (Jill et al., 2003).

One of the earliest models of a farm household was that of Chayanov (1925) who provided a theory of peasant behavior at the level of the individual family farm. He believed that behaviors of farm households were best understood in a household-firm framework, where potentially important interactions existed between external labor markets (nonfarm labor markets), the farm operation, and household consumption.

Chayanov hypothesized that households act to maximize utility by striking a balance between the satisfaction of consumption and distaste for labor or leisure. A related class of models based on Chayanov’s ideas has become known as the new household economics (NHE) models, first introduced by Becker (1965). The new household economics models assume that the household acts as a unified unit of production and consumption, which aims to maximize utility subject to its production function, income and total time constraint. The other model is Becker’s (1981) unitary household model that forms the foundation of the agricultural household model (Singh, Squire and Strauss 1986), through its assumptions on household decision-making through a single household head.

The NHE framework is, however, widely adopted in many studies and has provided a foundation for the study of household behavior (Hossain, 1989). Nakajima (1986) also extended the NHE theory to agricultural households and developed several kinds of models depicting various agricultural household situations. These agricultural household models, also known as integrated, production-consumption models, integrated farm- household models, or simply farm household models, are important as they provide a framework for predicting the responses of farm households to variations in such things as output prices, input prices, wage rates, technology, and family structure. These models also incorporate aspects of farm-household choices regarding home consumption of output versus sale of output to purchase non-farm consumption needs.

Historically, household-farm models were first introduced to explain the counterintuitive empirical finding that an increase in the price of a staple did not significantly raise the market surplus in the rural sector of Japan (Yoshimi et al., 1978). The search for an explanation led to a model in which production and consumption decisions are linked because the deciding entity is both a producer, choosing the allocation of labor and other inputs to crop production, and a consumer, choosing the allocation of income from farm profit and labor sales to the good produced and consumed by the same household, and consumption included both purchased and self produced goods. As long as perfect markets for all goods, including labor, exist, the household is indifferent between consuming own produced and market-purchased goods. By consuming all or part of its own output, which could alternatively be sold at a given market price, the household implicitly purchases goods from itself. By demanding leisure or allocating it’s time to household production activities, it implicitly buys its own time, valued at the market wage (Edward et al., 2002).

2.2.2. Agricultural Household Models

These models are widely used in micro research on rural economies in order to examine, analyze price policy, technology adoption and deforestation and the like even in the context of imperfect-market environments in rural economies. Considering joint engagement of in production and consumption, it is possible to use household model and agricultural household model interchangeably. However, strictly speaking, agriculture model heavily engaged in the agricultural activities.

As the agricultural household model (AHM) is one type of the household model, it recognizes that agricultural producers, both produce and consume the agricultural output produced by the household - i.e., the model assumes that farm output is consumed by producing households, with the surplus being marketed, a reality for most farm households in developing countries (Singh, et al. 1986). Further, the model incorporates a farm production function, reflecting the returns to farm self-employment. Moreover, the agricultural household model assumes a nonlinear farm production function, assuming that the marginal returns to labor decline with increases in production. The simple economic household model typically assumes that households maximize household utility subject to a set of linear constraints in the wage rate - inclusion of a function reflecting farm self-employment returns means that the returns to labor are assumed not constant.

As both production and consumption decisions are linked, setting the optimal level in the allocation of labor and other inputs to crop-production is a key role in the production side and choosing the optimal level in the decision of income allocation from farm profits and labor sales to the consumption of commodities and services is also a crucial move in the consumption side. The profit they have incorporated implicit profits from the produced and consumed goods by the same household. Note that their consumption includes self- produced and purchased goods. If considering the perfect competitive market, households reach the same level of decision between consuming market-purchased and own- produced goods. There is also a tradeoff between work time and leisure time in allocating their time to produce agriculture outputs. Such allocation of time, resources also put on its own implications to production and consumption decision.

The fundamental difference between an agricultural household model and a pure consumer model is that, in the latter, the household budget is generally assumed to be fixed, whereas in household-farm models it is endogenous and depends on production decisions that contribute to income through farm profits. Thus, to the standard Slutsky effects of the consumer model, agricultural household models add an additional, “farm profit” effect, which may be positive (e.g., if the price of the home-produced staple increases) or negative (as when the market wage increases, compressing profits). In a consumer model, when the price of a normal good (say, food) increases, its demand unambiguously decreases: a negative “real income” effect reinforces a negative “substitution” effect, as illustrated in the most basic indifference-curve analysis. However, the household-farm is both a consumer and producer of food. As a consumer, it is adversely affected by a higher food price, but as producer, its profit from food production increases. This adds a positive “farm profit” effect of the negative Slutsky effects on food demand, pushing the budget constraint outward. If this profit effect outweighs the Slutsky effects, the household’s demand for food increases with the food price (Inderjit et al., 1986).

A key assumption of most agricultural household models is that the household can obtain perfect substitutes for family labor in local labor markets—and conversely, that it can sell its own labor at a given market wage. This permits the household to decouple production from leisure: in response to a policy or market change, it can increase production (and demand more labor) while at the same time, consuming more leisure, by hiring workers to fill the resulting excess demand for labor. In its twofold role as consumer and producer, the households jointly put on decision regarding production, consumption, and labor allocation in interdependent way. Their objective function is to maximize a discounted future stream of expected utility subject to a large set of constraints. However, in most cases, several agricultural household models are static and households are considered risk neutral. At the end, a household-farm model generates a set of complex equations for all outputs, inputs, consumptions, prices and the like.

2.2.3. Linkages of Production, Consumption and Leisure Time

In the context of optimization of household models, it is possible to find the optimal level of output, inputs and consumption bundles. This allows identifying the links among production, consumption, factors of production and leisure time and possible to measure how strong the links are. Suppose there is an increase in the (market or policy- determined) price of agricultural output. All endogenous variables optimal levels do respond to the change in price at their respective magnitudes depending on their responsiveness. Among others, an immediate effect of the price increase is to raise the marginal product of all inputs including labor. The standard profit-maximizing rules that apply to the firm also apply to the household as producer: both hire inputs at the point where the marginal value product of the input equals the input price. In effect, the higher marginal value product of labor causes labor demand for agricultural production to increase due the fact that the market and decision interactions in a given economic setup.

In household models, they use their labor to produce goods and service on the family farm and to sell their labor in the labor market. As producers, an immediate effect of the price increase is to allocate more labor to on-farm production and less to wage work, because the opportunity cost of labor on the farm has gone up. Alternatively (and, in the basic model, equivalently), it may continue to supply labor to the market while hiring workers needed to expand staple production and maximize profits. In any case, the on- farm production effect of the crop whose price has increased is unambiguously positive, given the usual assumptions of production economics. As a consumer, they however, face a higher agricultural price.

They also experienced an increase in its income due to higher profits from farm production, leading to a positive income effect competing with the negative Slutsky effects outlined above. The effect on household consumption of the crop whose price has risen becomes ambiguous; it depends on the slope of the household’s utility function as well as the magnitude of the profit effect. In the case of a agricultural -price increase and perfect hired-labor market, there is no ambiguity on the labor side: the opportunity cost of leisure remains the same, equal to the market wage; the initial increase in the marginal value product of labor on the farm, due to the agricultural price change, is erased by the increased demand for labor on the farm (due to the assumptions of a fixed wage plus decreasing marginal physical product of labor); and the increase in income, due to higher profit from staple production, unambiguously increases leisure demand (reducing family labor supply), assuming that leisure is a normal good.

Shocks other than staple price changes may produce more complex, and analytically ambiguous, results. For example, the impact of an increase in market wage on leisure demand (the mirror of family labor supply) has three components in an agricultural household model: (1) a negative Slutsky effect, as the higher market wage increases the opportunity cost of leisure; (2) a positive labor endowment effect, familiar to those who have studied upward-sloping labor supply curves; plus (3) a negative farm profit effect, because labor is an input in farm production. The addition of the household-farm profit effect to the Slutsky and endowment effects does not resolve the ambiguity implicit in labor-supply models; however, it makes it more likely that the effect of a wage increase in leisure demand (labor supply) will be negative (positive) (Wallace, 1980). As these examples illustrate, there is potential for large biases if the interdependence between production and consumption is ignored when modeling, economic actors who are engaged simultaneously in both production and consumption.

Estimated household-farm models can be used to analyze a multitude of policy issues relating to agricultural development. The early uses were concerned primarily with farm price policy. The level at which agricultural terms of trade are set has wide implications for both efficiency and equity. Geographically diverse econometric studies (Kuroda and Yotopoulos (1978) in Japan; Lawrence J. Lau, Yotopoulos, Erwin C. Chou and Justin Y.F. Lin (1978) in Taiwan; Choon Yong Ahn, Singh and Squire (1981) in Korea; Peter Hazell and Alisa Roell (1983) in Malaysia and Nigeria; Strauss (1984) in Sierra Leone; Kamphol Adulavidhaya, Kuroda, Lau and Yotopoulos (1984) in Thailand) demonstrate that, as expected from neoclassical models, an increase in the price of a crop increases production of that crop (the own-price supply elasticity is positive). However, they also reveal positive consumption effects through farm profits.

Howard Barnum and Squire (1979), studying the Muda River valley in Malaysia, found that the production and marketed surplus responses to crop prices can be counterintuitive if market wages rise sufficiently: both productions of the crop whose price has risen and labor allocations to other crops can decrease. Whether that does or does not happen depends both on how households trade off income versus leisure (the substitution effect) and how much the value of the marginal product of labor increases (the income effect). These effects depend not only on the household’s economic characteristics, but also on its social-demographic characteristics (e.g., education and sex-composition; Griffin 1986). Barnum and Squire (1979) used a household farm model to estimate the opportunity cost of migration. Their estimates indicated that the true opportunity cost is about half of the marginal product of labor on the farm when allowances are made for the increase in supply of family labor remaining on the farm in response to reductions in household size, along with the effects of migration on market wages. Government income-redistribution, wage increase, and asset transfer policies have been studied with regard to their effects on production, factor demands, labor supply and consumption expenditures across households (Lau, Yotopoulos, Chou and Lin (1978). Constantino Lluch, Alan Powell and Ross A. Williams (1977) found that the savings rate is sensitive to the price of food and that this sensitivity is greatest for poor households. Strauss (1984) and Barnum and Squire (1979) use household models to estimate the net benefits of family planning, by using household farm models to study the cost-benefits of having one less family member when consumption, time allocation and production decisions are modeled simultaneously. Other applications of agricultural household models in developing country settings include Mark Rosenzweig (1980), Hanan Jacoby (1993), and Awudu Abdulai and Christopher L. Delgado (1999).

The examples cited above are for “whole” household-farm models, in which researchers estimate both the consumption and production sides of the model. Inspired in part by Ramon Lopez’ (1986) exploitation of the potential separability of agricultural household production from consumption decisions, a new generation of empirical rural economic research has emerged, grounded in household-farm theory but involving estimation of partial agricultural household models. Increasingly, the starting point for microeconomic research on small-farm economies, theoretical or applied, is an agricultural household (or, more generally, given the increasing diversity of rural economies, a household-firm) theoretical framework.

2.2.4. Importance of Crop Mix

Improved resource use and yield advantage: intercropping system has been reported to be more productive than sole crops grown on the same area of land. When two crops are grown together, yield advantage occurs because of differences in their use of resources (Willey et al., 1983)

Ground cover: - intercropping can provide quicker, greater and more extensive soil coverage. Longer periods of ground cover can help improve soil conservation in geographic regions prone to erosion (Woolley and Davis, 1991). Multiple cropping can enhance soil protection during critical erosion periods.

Water use efficiency: - as water is often a limiting resource, any improvement in the efficiency of water resource use as a result of intercropping may also lead to enhanced use of other resources (Hook and Gascho, 1988). Where moisture is the limiting resource, intercrops may offer both temporal and spatial advantages in water use (Baker and Norman, 1975).


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Rural Household Response to Shocks in Ethiopia. A Household Modelling Approach
Evidence From Ada’a Woreda Crop Mix
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Household, Response, Ethiopoa, Africa, Prices, technological, crops
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Asmayit Tekeste (Author), 2016, Rural Household Response to Shocks in Ethiopia. A Household Modelling Approach, Munich, GRIN Verlag,


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