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

Published on: **Mar 4, 2016**

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Business Technology

- 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!