ADDIS ABABA UNIVERSITY SCHOOL OF GRADUATE STUDIES FACULTY OF BUSINESS AND ECONOMICS ANALYSIS OF FACTORS AFFECTING THE TECHNICAL EFFICIENCY OF COFFEE PRODUCERS IN JIMMA ZONE: A STOCHASTIC FRONTIER ANALYSIS BY ALEMAYEHU ETHIOPIA DEREGE A thesis submitted to the School of Graduate Studies of Addis Ababa University in partial fulfillment of the requirements for the Degree of Master of Science in Economics (Economic Policy Analysis) MAY, 2010 Acknowledgments I am deeply grateful and indebted to Dr Wase Birhanu, my advisor, for answering my big call in short period of time and for his invaluable comments and suggestions. His contributions to this thesis and his profound contribution to my knowledge are very much appreciated in deed. Had it not been for his scrupulous observation, the completion of this paper would have been very difficult. It is impossible to list all names of those individuals who contributed to this thesis. I am extremely indebted to Jimma Zone Agriculture and Rural Development offices for providing me every necessary material and cooperation to my questions. My especial thanks are also due to Professor Tim Coelli, Mr. Badeso Taye, Mr. Qanno Telila, Mr. Hundanol Atnafu, Mr. Gezhany, Jimma zone coffee expert, Mr. Nabsu and Faxxanne for their especial cooperation and help. Above all I am very grateful to super Savior, God for enabling me to fulfill my all dreams in deed. My especial thanks also go to my parents, especially my grandfather Mr. Dareje shube for his moral and financial assistance. Finally, I would like to acknowledge my deep gratitude to African Economic Research Consortium (AERC) for granting the financial assistance to take part in the Joint Facility for Elective Programme in Nairobi, Kenya and for sponsoring my thesis. i Table of Contents Acknowledgments……………………………………………………………………………………………………………………………………i Table of Contents…………………………………………………………………………………………………………………………………….ii List of Tables…………………………………………………………………………………………………………………………………………..iv List of Figures…………………………………………………………………………………………………………………………………………iv List of Appendices………………………………………………………………………………………………………………………………....iv Acronomys and Abbreviations………………………………………………………………………………………………………………..vi Abstract………………………………………………………………………………………………………………………………………………….vii Chapter One: Introduction ............................................................................................................... 1 1.1. Background of the Study ..................................................................................................................... 1 1.2. Statement of the Problem .................................................................................................................... 3 1.3. Objective of the Study ......................................................................................................................... 5 1.4. Hypothesis of the study ....................................................................................................................... 5 1.5. The Scope of the Study ....................................................................................................................... 6 1.6. Significance of the Study .................................................................................................................... 7 1.7 Organization of the Study .................................................................................................................... 8 Chapter Two: Literature Review ...................................................................................................... 9 2.1. Theoretical Literature .......................................................................................................................... 9 2.1.1. Definitions of Efficiency .............................................................................................................. 9 2.1.2. Techniques of Efficiency Measurement ..................................................................................... 12 2.1.3. Approaches for Identifying and Analyzing Determinants of Technical Efficiency ................... 13 2.1.4. The Econometric Approach to Efficiency Measurement ........................................................... 15 2.1.5. The Stochastic Production Frontiers Approach ......................................................................... 17 2.1.5.1. The Normal-Half Stochastic Frontier Model ...................................................................... 19 2.1.5.2. The Exponential and Truncated-Normal Stochastic Frontier Models ................................. 23 2.2. The Empirical Literature ................................................................................................................... 24 Chapter Three: Data and Methodology .......................................................................................... 30 3.1. Background of the Study Area .......................................................................................................... 30 3.2. Data source and Sampling Design .................................................................................................... 31 ii 3.2. 1. Sources of Data ........................................................................................................................ 31 3.2.2. Sampling Design ........................................................................................................................ 32 3.2.3. Data Quality Control and Questionnaire Organization .............................................................. 35 3.3 Methodology of the study .................................................................................................................. 36 3.3.1. Model specification .................................................................................................................... 36 3.3.1.1. The Empirical stochastic frontier model ............................................................................. 37 3.3.1.2. Sources of Technical Inefficiency ....................................................................................... 39 3.3.2. Method of data analysis ............................................................................................................. 41 3.4. Definitions and Measurement (Indicator) of variables used in stochastic and technical inefficiency effects models .......................................................................................................................................... 43 Chapter Four: Results and Discussion ............................................................................................ 50 4.1. Descriptive analysis .......................................................................................................................... 51 4.1.1 Summary statistics of the variables ............................................................................................. 51 4.2. Econometrics Analysis ...................................................................................................................... 54 4.2.1. Hypothesis testing ...................................................................................................................... 56 4.2.2 Effects of Distributional Assumptions on Technical Efficiency Estimates (Model Comparison and Selection) ....................................................................................................................................... 58 4.2.3. Kernel density estimation for the truncated normal distributional assumption .......................... 63 4.2.4 Technical Efficiency: Result from Truncated normal Model ..................................................... 64 4.2.5 Partial Elasticities and Return to Scale ....................................................................................... 64 4.2.6 Technical efficiency of Jimma zone by woreda .......................................................................... 67 4.2.7. Input Utilization, Technical efficiency, Actual and Potential Yield of coffee producers in the Jimma zone .......................................................................................................................................... 69 4.2.8 Analysis of Factors Affecting Technical Inefficiency ................................................................ 71 Chapter Five ................................................................................................................................... 77 5.1 Conclusions and Policy implications ................................................................................................. 77 5.1.1 Summary and conclusions ........................................................................................................... 77 5.1.2 Policy Implications...................................................................................................................... 81 Referances ...................................................................................................................................... 85 List of Appendices .......................................................................................................................... 90 iii List of Tables Table 1 Distribution of Sample households per Woreda ............................................................................. 35 Table 2 Summary statistics and mean difference across technically efficient and inefficient households .. 51 Table 3: Likelihood ratio