International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI) in collaboration with Ethiopian Economics Association (EEA). Eleventh International Conference on Ethiopian Economy. July 18-20, 2013

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Price Response of Rural Households
in Ethiopia: Case of three weredas
Feiruz Yimer
IFPRI ESSP-II
Ethiopian Economic Association
Conference
July 20, 2013
Addis Ababa
1

2. Outline
• Introduction
• Theory
• Model Specification
• Descriptive
• Estimation
• Result

3. 3
Introduction
-In Ethiopia, policies are being designed, and mostly are targeted
on farm households
-Singh et al., 1986 pointed out the problem of predicting resultant
effect of the pursued policies
-Possible source of these problem:
•Household heterogeneity both in endowments and
preferences (Kuiper and Ruben, 2005).
•Duality behavior of households (Singh et al., 1986).
That is, households operate in semi-commercialized farms where they
produce mainly for consumption and sell the remaining produce in the markets.
-Unfortunately, markets are mostly imperfect and even some are
non-existent.

4. Intro… Cont.
Objective: empirically investigates the households’ price response
considering the dual behavior of households.
Data: Ethiopian rural household survey conducted by Ethiopian
Economic Policy Research Institute and Ethiopian Economic
Association in collaboration with the World Bank in 2006/07.
• Sample size -217 households
• From three wereda :77 from Bako, 70 from Tiyo/Eteya and 70 from Yetmen.

5. Theory
• Agricultural household model (Singh et. al. ,1986)
• Unitary household model- joint decision making for maximization
(Maitra and Ray, 2003).
• The unitary household model is of two types:
 Separable (recursive) household model
 Non-separable (non-recursive) household model
• Separable household model-
 Markets clear
 Production decision is independent of consumption decision (Vance and
Geoghegan 2004; Strauss 1986)
• Non-separable household model-
 Market failure
 Production decision is not independent of consumption decision.

6. Theory…Cont.
• Assumption of existence of perfect markets badly misstates the
impact of policy (Lofgren and Robinson, 1999).
– Because the shadow price will be treated wrongly as constant (Singh et al. 1986)
• Market imperfection widen the price band of selling and buying prices
• Due to underdevelopment of markets in developing countries, the
non-separable model will be the convenient way of modeling rural
households (Vance and Geoghegan, 2004).

7. Model Specification
• Non-separable household model is adopted
Assumptions
• The household is:
is taken as a single decision making unit.
produce food crops.
heavily rely on family labor and may use other traditional group
work programs in the production process.
do participate in markets whichever available but the labor market
is assumed to be thin.
buy manufactured goods from market.

8. Model Spec….Cont.
EXPXPCXPCP
CXT
rxG
LLvvaaamm
LLL
+−−−≤
≥−−
=
////)(
0
0),(
*
subject to)(Max cU
By solving derivative equations of the above function using lagrangian
operator will give the optimal values predicted by the following eqn.:
),( rPX ii =
),( YPC ii =
LLmmaa CPCPCPY *
++=

9. Model Spec…Cont.
• Two effect of change in exogenous prices (De Janvry et. al. ,1991 and
Strauss,1986)
j
L
LPjj dP
dP
P
A
P
A
P
A
L
*
*
*
conttant
∂
∂
+
∂
∂
=
∂
∂
=
vamj ,,where =
LamiCA ,,==
LvaiX ,,=
*
j
j
P
P
∂
∂
is the internal adjustment of the household in
response to the change in exogenous price.

10. Empirical Specification
• Symmetric normalized quadratic profit function (SNQ)
• Advantage of SNQ (Jensen et.al.,2004 and Diewert and Wales, 1987 )
 Flexibility
 operational even when profit is negative
 convexity can be imposed globally
∑∑∑∑∑∑∑ ======
−
=
+++=
gj
jninij
gigj
jninij
LvaiLvai
jninij
LvaiLvai
ininn RRwPPPPwPrP γδβαπ
2
1
2
1
),(
,,,,,,
1
,,

11. Cont.
• Almost Ideal Demand System(AIDS).
• Advantages (Deaton and Muellbauer,1980)
 Able to test homogeneity and symmetry
 Satisfies axioms of choice
Lami
P
Y
BPw n
ijnijii ,,whereloglog =++= ∑γα
∑∑∑ ===
++=
Lami
jninij
Lami
in
Lamj
i PPPP
,,,,,,
0 loglog
2
1
loglog γαα
index.priceconsumertranslogislogandwhere P
Y
CP
w
n
inin
in =

12. Descriptive
Table: Average yield level in kg/ha
Tiyo/Eteya Yetmen Bako
White Teff 880 1109.41 345.08
Black/Mixed
Teff 1218.18 908.06 293
Barley 1657.22 1053.53
Wheat 2207.53 776.84
Maize 1445.63 1292.47
Sorghum 1835.71 728.29
Horsebeans 1438.89
Potatoes 7966.92
Peas 1670.42
Vetch 1196.44
Nigger Seed 589.12 226.67
Pepper 330.36

13. Table: Average land size in ha by crop type
Tiyo/Eteya Yetmen Bako
White Teff 0.19 1.61 0.67
Black/Mixed
Teff 0.22 0.4 0.73
Barley 0.32
Wheat 1.37 0.43
Maize 0.25 0.27 1.32
Sorghum 0.23 0.63
Horse beans 0.29
Potatoes 0.28
Peas 0.26
Vetch 0.32
Nigger Seed 0.23 0.62
Pepper 0.64
Cont.

14. Estimation
• Labor market is assumed to be thin
• The linkage of the production and consumption decision is through
the endogenous price (De Janvery et. Al., 1999)
o First step- the profit function is re-constructed assuming that labor
has a constant returns to scale and the price of labor is endogenous to
the household. To determine shadow price of labor
o Second step- shadow price of labor is obtained from the fitted values
of the profit.
o Third step- the SNQ profit function is re-estimated taking labor as a
variable input with the shadow price of labor.

15. Estimation…Cont.
• There arises the problem of endogenity; mainly due to the
introduction of the shadow price of labor- in the estimable equation.
Possible instruments:
- age of the household head
- number of dependents
o Forth step- AIDS is estimated using iterative least square method for
its ability to correct coefficient of covariance matrix (Bundell and
Robin, 1999)
 The inclusion of shadow price of labor introduced the problem of endogeniety
where number of dependents and age of the household head are used as
instruments. 2SLS estimation procedure is used

16. Results
Table: Price Elasticities on Production Side
pOutput pInput pLabor
qOutput 1.0879455 -0.2848921 -0.8030535
qInput 0.7165381 -0.2738893 -0.4426488
qLabor 1.0071627 -0.220727 -0.7864356

17. Result… Cont.
Table: Price Elasticities on Consumption side
pAgric pLabor pMfd
Marshallian(Uncompensated)Price Elasticities
Agri.cons -0.672458 -0.5882585 0.008148415
Leis.cons -0.0557232 -0.8650533 -0.02798117
Mfd.cons 0.02670037 -0.7358634 -0.47466048
Hicksian(Compensated)Price Elasticities
Agri.cons -0.5015687 0.4412368 0.06033183
Leis.cons 0.07371695 -0.0852621 0.01154515
Mfd.cons 0.1882108 0.2371302 -0.42534104

18. Result… Cont.
Table: The non-separable household model
elasticities
pAgri pVar pMfd
-0.89 -1.09 0.32
-0.36 -0.09 0.176
-0.88 0.41 0.32
2.69 -0.96 -0.57
-2.6 -1.17 -0.16
1.39 -0.55 0.02
2.46 -0.8 -0.4
*
LP
aX
VX
LX
LC
mC
aC

19. Concluding Remark
• The elasticities reveal that households respond inversely in production
level for price change of agricultural goods.
• Moreover, such change in the price agricultural is expected to deepen
the use of modern fertilizers.
• upward movement of fertilizer price reduces production of
agricultural goods and also use of inputs
• Caveats
-household behavior towards risk
-the implication of credit market failure on households response

20. Thank You!