Effect of Credit Constraint on Production Efficiency of Farm Households in Southeastern Ethiopia

Abstract

Credit constraint in agriculture affects not only the purchasing power of producers to procure farm inputs and to cover operating costs in the short run, but also their capacity to make farm-related investments as well as risk behavior in technology choice and adoption. These, in turn, influence technical efficiencies of the farmers. Although credit constraint problem has been recognized in economics literature, especially in those dealing with developing countries, little emphasis has been given to its effect on productive efficiency of farmers. In light of this, explicitly considering credit constraint, this paper estimated technical efficiency of credit-constrained (CCFHs) and unconstrained farm households (CUFHs) by employing a stochastic frontier technique on farm household survey data from Southeastern Ethiopia. The CCFHs had mean technical efficiency score of 12% less than that of the CUFHs. Given the largest proportion of CCFHs in Ethiopian farming population, this gap implies considerable potential loss in output due to inefficient production. Improving technical efficiency of all farm households in general but more of particularly the CCFHs is desirable. Additional sources of inefficiency differential between the two groups were also identified, and education level of household heads, land fragmentation and loan size significantly affected technical efficiencies of both groups. Besides, wealth and experience affected the CCFHs, and household size affected the CUFHs. In general, the results have important implications for credit, education and land policies in developing countries.