Does Contract Farming Improve Efficiency? A Stochastic Frontier Analysis

Published on by Stephanie McWhinnie
Agriculture is a vital source of livelihood for people in developing countries but extreme poverty is widespread. Contract farming has been evaluated as a mechanism to improve welfare outcomes but limited insights have been provided regarding its effects on farmer efficiency. Using data from a randomized controlled trial in Benin, we estimate and compare the technical efficiency of rice farmers using a stochastic metafrontier approach. This allows us to decompose the treatment effect into technological expansion and pure efficiency improvements. We find that there is a significant, positive treatment effect and that this effect is predominantly driven by an expansion in the technology set of farmers. We exploit the stratification of treatment within the trial to identify the mechanisms through which contract farming can improve the efficiency of farmers. Our results show that a fixed-price contract is sufficient to capture the majority of overall efficiency improvements, with only marginal further improvements from contracts featuring extension services or provision of inputs. Keywords: Contract Farming, Efficiency, Technological Expansion, Stochastic Metafrontier, Program Effects JEL classification: D24, L14, O13, O33, Q12.

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