Farming or burning? shadow prices and farmer s impatience on the allocation of multipurpose resource in the mixed farming system of Ethiopia

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1 Farming or burning? hadow price and armer impatience on the allocation o multipurpoe reource in the mixed arming ytem o Ethiopia Hailemariam Teklewold PhD Candidate Univerity o Gothenburg, School o Buine, Economic and Law, Department o Economic, PO Box 640, SE , Gothenburg, Sweden. Tel: ; Hailemariam.Teklewold@economic.gu.e Paper prepared or preentation at the EAAE 2011 Congre Change and Uncertainty Challenge or Agriculture, Food and Natural Reource Augut 30 to September 2, 2011 ETH Zurich, Zurich, Switzerland Copyright 2011 by [Hailemariam Teklewold]. All right reerved. Reader may make verbatim copie o thi document or non-commercial purpoe by any mean, provided that thi copyright notice appear on all uch copie.

2 Farming or burning? hadow price and armer impatience on the allocation o multipurpoe reource in the mixed arming ytem o Ethiopia Hailemariam Teklewold 1 Abtract In crop-livetock mixed arming ytem where arm yard manure (FYM) i conidered a important multi-purpoe reource uch a ource o oil organic matter, additional ource o income and houehold ource o energy, oil ertility depletion could take place within the perpective o the houehold allocation pattern o FYM. Thi paper etimate tructural FYMallocation model in the preence o corner olution, with the objective o examining the role o variou return to FYM and armer impatience on the propenity to allocate FYM or alternative purpoe. We illutrate the model uing data baed on a random ample o 493 arm houehold in the central highland o Ethiopia. We ind that the higher the elling price o FYM i the higher the incentive or armer to divert the reource rom arming to marketing or burning outide the arm houehold. A armer deciion to turn FYM rom arming to marketing due to heterogeneity in time preerence i alo an alternative account to explicate the correlation between armer impatience and reource allocation. The implication i that the high dicount rate and the rie o price encourage current conumption that ha long term eect on the utainable management o oil reource. The reult are o paramount importance or the deign o utainable land management policy where oil ertility depletion i alient or low agricultural productivity. Key word: impatience, hadow price, allocation, arm yard manure, Ethiopia JEL Claiication: Q01, Q12 1 Hailemariam Teklewold i PhD Candidate at Univerity o Gothenburg, School o Buine, Economic and Law, Department o Economic, PO Box 640, SE , Gothenburg, Sweden. Tel: ; Hailemariam.Teklewold@economic.gu.e. Financial and logitic upport or thi tudy rom EIAR (Ethiopian Intitute o Agricultural Reearch) and Sida (Swedih International Development and Cooperation Agency) through Environmental Economic Unit, Univerity o Gothenburg i grateully acknowledged.

3 Introduction The problem on utainable development in developing countrie ha been cloely aociated with the extent o reource degradation (Pender 1996). In countrie where agriculture i the main tay o the economy, oil ertility depletion i an important ource o reource degradation cauing low agricultural productivity and declining per capita income. Baically in the ideal agrarian economy, productive and utainable production ytem require a combination o inorganic ertilizer together with organic ertilizer uch a crop reidue and arm yard manure (FYM) to replenih oil and maintain the oil organic matter level (Place et al 2003; Heerink 2005). However, limited ue o nutrient input among mall holder armer exacerbate oil nutrient deiciency (Place et al 2003). Under contrained upply o FYM, conumption o FYM are intricately interlinked with utainable oil ertility in uch a way that the demand or FYM or energy within and outide arm houehold hit the reource to the extent that the application o FYM to the arm i limited or improving oil ertility. Undertandably the ue o FYM a ource o energy or the arm houehold and ued or arming a ameliorating oil ertility i well documented (Mekonnen and Kohlin 2008). However, previou tudie were neglecting the role o FYM a ource o additional income or mallholder armer allocated or elling or ue motly by peri-urban dweller outide the arming community. There i a growing evidence (Mekonnen and Kohlin 2008) and obervation in mot rural and peri-urban area that depite the knowledge o alternative energy reource uch a keroene, electricity and liqueied petroleum ga, high price and lack o acce hinder their wide application a ource o dometic energy. A a conequence, due to ubtitutability o animal dung to thee alternative ource o energy (Heltberg et al 2000), the demand or FYM and it price in the market ha rien. A other carce reource, FYM i allocated to dierent activitie baed on the etimate o the expected beneit obtained in comparion with the opportunitie orgone. According to tandard economic theory, houehold allocate FYM to the market i the market return rom elling manure i higher than the value o marginal product o FYM in arming. Naturally, due to the long time or the mineralization proce in which the nutrient in the organic compound can become available to the crop (Place et al 2003) and the eaonality or the agricultural production, the beneit rom arming with FYM i not orthcoming in hort time compared to the beneit earned rom elling FYM. The dicounted utility model tate that later return hould be dicounted by a ixed proportion o their utility or every time interval that they are to be delayed. Baically, thi devaluation hould generally cloely relate to the market interet rate. However, in the preence o credit market ailure and contrained acce to inancial reource, armer ubjective dicount rate routinely deviate and uually higher than rom the prevailing market interet rate (Yeu and Blutone 2009). Thu, thi delay in return coupled with credit contraint in developing countrie (Pender 1996; Yeu and Blutone 2009) might make elling FYM a an important trategy o additional ource o income or armer. The implication here i that allocation o FYM depend on the extent to which armer degree o impatience to wait the return rom FYM among the variou alternative. In term o reource degradation, armer rate o time preerence i the critical actor aecting the utainability o reource ue, which indicate by how much agent dicount the utility o conuming in the next period relative to the utility o conuming now (Lence 2000; Pender 1996; Holden et al 1998). A widely accepted conjecture in the literature i that heterogeneity in armer dicount rate arie in repone to poverty (Becker and Mulligan 1997; Holden et al 1998; Pender 1996; Tanaka et al 2010) and imperection in credit market (Pender 1996; Yeu and Blutone 2009). 1

4 The act that the multi-purpoe ue o FYM or arming or burning i generally conidered a link between armer behavior and reource degradation, the caue o oil ertility depletion extend beyond the arm, receiving eect rom houehold economic condition. The main ocu o thi paper i the conideration on the tradeo between uing FYM a input to agricultural production or burning them or uel within and outide arm houehold with the objective o examining the role o hadow price or FYM and armer rate o time preerence on the propenity to allocate FYM or alternative purpoe. Thi tudy took place in the central highland o Ethiopia and involve arm houehold operating the mixed croplivetock arming ytem. Due to limited agricultural inteniication that contrained the availability o FYM, armer ace the problem o allocation o FYM among the dierent alternative. The data upport the prediction and how that armer time preerence and the hadow price o FYM are important predictor o the allocation o thi multi-purpoe reource. Individual with high rate o time preerence allocate le FYM to the arm and the higher the elling price o the manure i the higher the incentive or the arm houehold to divert the reource to elling. Conceptual ramework In order to identiy the eect o the dierent return o FYM and armer impatience on individual allocation trategy, we contruct a arm houehold model (Sadoulet and dejanvry 1995), aumed armer a engaged imultaneouly in agricultural production, conumption and marketing deciion. Our approach i in the pirit o Fiher et al (2005) and Shively and Fiher (2004) who developed a labor allocation model in which houehold divide their labor reource among arming, oret employment and non-oret employment; and provide an improved aement on the eect o houehold hadow price in a given activity or oret decline. However, we add two main eature in the model: the return rom FYM to allow or deciion driven by proit or conumption motive; and include an experimentally meaured time-preerence component to capture the armer impatience on the trade-o between current conumption or elling o FYM and arming with FYM. Given a total amount o FYM at her dipoal, the armer deciion conit o allocating M between arming m ), burning in the houehold m ) and elling in the market a ource o ( uel ( m ). The implication i that arm houehold in the area are emi-commercial where even i market or FYM exit mot kept ome or home conumption and arm production. Obervation o the data or thi tudy ha revealed that all arm houehold obtained FYM or burning m ) and arming m ) rom their own production ytem without making any ( e ( purchae. For a armer who exhibit corner olution in FYM elling or arming, then the * * hadow price o FYM or elling ( p ) and arming ( p ) will be endogenouly determined by parameter aecting the houehold production and conumption deciion. Inveting FYM on the arm mean potponing the current conumption originated rom burning dung in the houehold or income earned rom elling FYM in the market. Thi lo interpreted a the beneit obtained rom elling or burning FYM now i aumed to be compared and oet by the dicounted return o FYM in arming at a later time. When inancial capital i carce and interet rate are high a in the cae in Ethiopia (Yeu and Blutone 2009), the high opportunity cot o capital coupled with liquidity contraint drive ubjective dicount rate above market interet rate. With the ubjective dicount parameter ( ) the relationhip between time preerence and allocation behavior are more pronounced. A armer dicount rate i expected to aect a houehold reource allocation ollowing the ( e 2

5 tandard intuition: a higher δ hould reult in higher reource toward or current conumption. From the houehold optimization problem we can derive a et o etimable reduced orm Marhallian demand unction o FYM or arming, or houehold energy and the upply o FYM or elling in the market. Thee are expreed a unction o hadow price o FYM or elling ( p ) hadow price o FYM or arming ( p ), armer time preerence ( ) and other individual and community characteritic ( z ): Empirical trategy m m mp, p, ; z m e Shadow price The empirical trategy involve a equence o etimation tage. Firt, we etimate a production unction to obtain the marginal product o FYM or thoe participating in FYM arming. Second, we ue the marginal revenue product etimate rom the above tep and the oberved elling price and employ ample election model to compute hadow return or the ubample o houehold that do not upply FYM or arming or market. Third, we etimate the tructural FYM upply unction. Following Jacoby (1993) and Skouia (1994), the irt tep in the empirical analyi i to obtain the value o marginal productivity o FYM ( p ) etimated at the lope o the production urace around the input ue vector or each arm houehold. At the equilibrium point, the hadow price o FYM or each arm houehold i jut the value o marginal product o FYM in agricultural production. The arm-level production unction in logarithmic orm i peciied a: ln q ln m k k ln x k where q reer the total value o agricultural output produced, m i quantity o FYM ued a organic ertilizer and i the etimated parameter or it; x k are the quantity o other input ued, k are parameter etimated or other input, and i the error term. The peciied production unction alo include the ollowing input: quantity o inorganic ertilizer, eed ued, arm labor, cropped area, drat animal ervice, hare o area covered with modern crop varietie; plot and location characteritic are alo included to control arm and village peciic actor. In the empirical model ertilizer and improved eed ue are uually conidered a potentially endogenou (Kaie et al 2009). In line with Jacoby (1993) who worked on cro-ectional data and had rely on production and conumption ide intrument that are valid under noneparability, the endogeneity (revere cauation) o arm input uch a ertilizer and improved eed i controlled with intrument uing two tage leat quare method (IV- 2SLS). We intrumentalie thee endogenou variable with village peciic and houehold characteritic 2 and veriy the tatitical validity o the intrument by perorming an over * 2 The intrument include: locational dummie, amily ize in adult equivalent, age o the head, requency o extenion contact, nearne to development agent, average ditance to arming plot, participation in village aving and credit aociation. 3

6 identiication tet. Following the etimation o the production unction, the etimated * parameter or FYM i ued to derive the value o marginal product ( p ) a ollow: p qˆ m β coeicient. ; where qˆ i the predicted value o output rom the etimated I all arm houehold ue FYM or arming or elling in the market then the tandard reource allocation model emerge. However, a pointed out above the ample in thi tudy are likely to be non-random due to the preence o corner olution. On average about 80 percent o the ample armer participate in each option. A armer deciion regarding her participation in FYM arming or elling may, however, be endogenouly determined with the return rom FYM. Hence direct etimation might lead to the potential ample election bia. Thereore, ollowing the approach o Shively and Fiher (2004) and Fiher et al (2005), a hadow value o FYM in on arm production i imputed by etimating participation in FYM arming and the value o marginal product jointly applying the maximum likelihood approach (Heckman 1974). The empirical identiication o the model require that, in addition to the exogenou variable both in the participation and outcome equation, one or more identiying variable are included only in the participation equation (Ficher et al 2005). The perormance o the etimator arie rom the exitence o uch excluion retriction. Conequently, in our enabling identiication o the hadow value ret on certain potential variable, uch a the average ditance rom home to arm; houehold own mean o tranportation; o-arm income; herd ize; ditance to the mot viited market center; ize o cultivated land; whether houehold adopt tove and expenditure on alternative energy ource. Thee variable hypotheized to aect the likelihood o participation in FYM arming through their inluence on hadow value but not through the oberved return. Other variable enter both in participating and hadow value equation include: age, ex, education and marital tatu o the houehold head; location dummie; amily ize; proportion o area covered under legume or crop rotation and herd ize. The etimated parameter rom the marginal product * equation are then ued to etimate the hadow price o FYM in arming ( p ) or each arm houehold in the ample. A imilar etimation method i motivated by an extenion o Heckman uggetion or imputing armer aking price or FYM or the hadow price in FYM marketing (the value that the armer place on FYM or elling). Again, the etimation relie on two behavioral chedule: the unction determining participation o a arm houehold in the market and the unction determining the elling price equation. Econometric approach: FYM allocation The peciication o the econometric model or the analyi o FYM allocation i baed on the three-way choice tructure etablihed in the previou ection. Conceptually, armer FYM allocation are related one another among the available alternative. Thi doen t provide enough upport to build eparate model o allocation or each option, rather a a et to increae eiciency. But becaue thee allocation outcome are correlated tatitically, it i expected that diturbance term acro model o each outcome might alo be correlated. Such interconnectedne implie that OLS model, which aume abence o correlation among the diturbance term, yield ineicient etimate o coeicient. A more eicient etimation technique in uch cae i the eemingly unrelated regreion, or SURE (Zellner 1962). SURE relaxe the aumption o uncorrelated reidual and imultaneouly etimate the three 4

7 equation a et. The ytem o equation or FYM arming, burning and elling repectively can be expreed more parimoniouly a: m p p z m m e e e p p z p p z e ez z z th th where ik i parameter to be etimated or the i equation and k variable Each equation i expected to atiy the aumption o the claical regreion model. However, i the regreion diturbance in the dierent equation are mutually correlated E, or i, j =, e, then: i j ij That i, ij i the covariance o the diturbance o the i th and j th equation, which i aumed to be contant over all obervation, and i the link between the i th and j th equation. The etimation procedure o SUR model wa baed on the Feaible Generalized Leat Square (FGLS 3 ) approach. The Lagrange Multiplier tet developed by Breuh and Pagan (1980) will tet the peciication or SUR model with the null hypothei o 0. The tet tatitic i given by: N 3 i2 i1 j1 r 2 ij ; where r 2 ij ii jj e 2 ij, i the quared correlation. ha m m 2 ditribution with 3 degree o reedom. I the tet ail to reject the null hypothei, etimation with SUR will be eicient. Data and tudy area Thi tudy i baed on data rom houehold urvey conducted in cereal-legume baed mixed crop-livetock arming ytem o three zone in the central highland o Ethiopia eat, wet and north Shewa zone ielded by the Ethiopian Intitute o Agricultural Reearch (EIAR) in The three zone are ound within the radiu o 100 km rom the main capital city o the country, Addi Ababa. Thi and the peri-urban area urrounded the tudy area are important market opportunitie or armer or their product and by-product. In particular the three zone are characterized by dierence in the availability and ue o the FYM reource and their acce to FYM market. The horter the ditance to the FYM market implie the higher the demand or FYM by the urrounding peri-urban communitie and the lower the tranaction cot and hence the higher the price o FYM. The empirical invetigation i baed on data acquired rom 493 hundred arm houehold randomly elected and participated in thi tudy. Table 2 contain the decription and ummary tatitic o the variable ued in the analyi. Farmer alo reponded to hypothetical quetion elicited inormation regarding their time preerence uing the experiment mentioned below. 3 The FGLS etimator o α i: ij FGLS y 1 y 1 1 y m ; where y i vector o explanatory variable and. The FGLS i a two-tep etimator where OLS i ued in the irt tep to obtain reidual and an etimator. The econd tep compute FGLS baed on the etimator in the irt tep. 5

8 In thi tudy, or eliciting dicount rate, choice tak which i the mot common experimental method or eliciting time preerence (Frederick et al 2002; Holden et al 1998; Yeu and Blutone 2009; Pender 1996; Bezabih 2009) i ued. Here, ubject were aked to chooe between a maller, more immediate reward and a larger, more delayed reward. In thi ramework the repondent were aked to chooe between the hypothetical uture value payable ater one year (almot one cropping eaon) equivalent to a ixed preent value. A erie o ix binary choice between the peciied amount o wheat grain (50 kg) to be received now or the alternative amount o wheat grain (uch a 65, 80, 105, 130, 160 and 195 kg) to be given a year later were preented in the order mentioned to how which option the armer preerred within each choice pair (ee annex 1 or baic tructure). The choice o the alternative amount or uture reward i baed on taking the midpoint o the alternative rom the credit term o the local merchant who oten provide credit or cah contrained armer or the purchae o arm input uch a eed and ertilizer beore planting; in agreement with repayment in kind with grain ater harvet at about 100% rate o interet. Empirical reult Shadow price on FYM allocation The etimated hadow price predicted in the irt tage o the analyi together with armer degree o impatience and other houehold demographic inormation were matched with the individual arm houehold FYM allocation data. The parameter o the variou allocation equation or FYM are etimated by ytem o equation a a et o unretricted eemingly unrelated regreion. The reult i preented in Table 3. The tatitical perormance o the etimated model i quite appealing. The calculated χ 2 -tatitic o i tatitically igniicant at 1% igniicance level, providing evidence or the hypothei o joint igniicance o the explanatory variable acro all equation. A expected, the Breuh and Pagan (1980) tet o independence conirmed the rejection o the null hypothei that tate the covariance o the error term acro equation are not correlated. The tet 4 upport the etimation with SUR (χ 2 (3) = with the aociated p-value o 0.000). The point etimate o hadow price o FYM rom elling n p and arming n p in the FYM arming equation i negative but individually tatitically dierent rom zero at 1% igniicance level or hadow elling price only. The negative ign o FYM hadow elling price in the arming equation indicate the expected cro-price elaticity that a the elling price o FYM increae allocation o FYM to arming decreae. The etimate or uncompenated elaticity i that a one percent increment o elling price o FYM lead to a more than one percent decline o FYM or arming. Thi i a negative repone a ar a the mallholder oil ertility maintenance i concerned and implication on utainable management o one o the mot important natural reource. The available empirical evidence or expanion eect i the poitive and tatitically igniicant point etimate o o-arm income in FYM arming equation. A income increae by one percent, FYM or arming increae by about 1.3 percent. Hence the reult conorm the negative uncompenated cro hadow elling price eect a a reult o the negative compenated cro price eect dominated the poitive expanion eect. It i alo worth noting the lack o tatitical upport or the eect o return on FYM arming on FYM elling but the aociated negative and igniicant eect on FYM burning. In the ormer cae, there i no tatitical evidence even that upport the income eect on FYM 4 χ 2 (3) =

9 elling. The negative cro-price eect on the latter (-0.21 percent) i due to the negative cro-price ubtitution eect that dominate the poitive and igniicant expanion eect where the elaticity i etimated at about 4 percent due to a one percent increment in income. In act, thee reult all together might imply that burning FYM i le beneicial relative to FYM arming and elling. Hence, with the change in return o FYM in arming, armer might conider the allocation o FYM or burning, conidering the allocation o FYM or elling unchanged. The point etimate or FYM elling price in FYM elling equation i poitive and tatitically dierent rom zero at the 1% igniicance level. A expected, the inding reveal that armer rationally repond to the change in hadow price o FYM elling in the allocation o FYM or elling. The poitive uncompenated own price eect work primarily through the poitive ubtitution eect which outweigh the income eect. According to thi analyi, there i no tatitical evidence that upport the igniicance o the income eect. Theoretically, holding any other variable contant, a change in elling price o FYM aect the rate o ubtitution between FYM burning at home and elling. A or allocating FYM or elling, it baically depend on the extent o the change in FYM or arming and the change in houehold conumption o energy rom FYM burning. The increae in hadow elling price o FYM increae the price in term o burning at home, thereby making burning FYM more expenive. Thi ubtitution eect, thereore, tend to cut the amount o FYM allocated or houehold energy, while the expanion eect i poitive and igniicant with an etimated elaticity o about 27 percent or a one percent increment o o-arm income. On the net, the uncompenated cro-price elaticity i poitive, which i about 1.1 percent. Farmer impatience on allocation o FYM When the repondent preerence hit rom the early amount to the amount or a later reward, the implicit one year rate o time preerence wa calculated a ollow: n p, where the repondent i indierent between an amount o p at the current time and a reward o received one year in the uture. The mean dicount rate in thi experiment i about 94%. Pender (1996), however, ha reported a dicount rate o 30-60% or Indian village, wherea Holden et al (1998) ound a mean dicount rate o 93% or Indoneia, 104% or Zambia, and 53% or one village in Ethiopia. Similar to Holden et al (1998) and Pender (1996) who ound an upward bia rom their experiment that aked armer to adjut a preent value equivalent to a ixed uture value, about 64 per cent o armer in thi tudy were ound to have a high dicount rate (95 135%), in an experiment that ak the uture value equivalent to a ixed preent value, however (Fig. 1). The data enabled u to link urvey repone on FYM allocation rom arm houehold to experimental repone by the ame arm houehold. The key actor or the allocation o FYM among the available option i the trade-o between arm proitability due to oil ertility enhancement but with delay; and immediate earning or energy conumption rom direct elling or own burning. Thi let the deciion maker to make comparion between alternative option that have immediate or delayed outcome. From the oregoing dicuion, the marginal return o FYM in arming i higher than the price o FYM rom elling in the market, but that the ormer i with delayed outcome and the latter with immediate beneit. A an inter-temporal choice in term o motive aociated with time, the economic tradeo i a deciion about allocating reource between the competing interet, uch a arming or burning, hence including the armer degree o impatience meaured with ubjective dicount rate i o important. The parameter etimate or the armer time preerence are in agreement with the expectation in the FYM allocation equation. The point etimate o 7

10 armer degree o impatience in the FYM elling equation i tatitically dierent rom zero at the 90% conidence level. The poitive ign indicate armer that have high degree o impatience increae allocation o FYM or elling. Noting the theory that people have a poitive time preerence how preerence or receiving a commodity immediately are perectly oberved in the FYM elling equation. In FYM elling, armer uually receive the return immediately o that, it i a choen option among the available one a ar a impatient arm houehold are concerned. On the contrary, armer degree o impatience negatively aect the allocation o FYM in arming and burning, but at 90 and 88 percent conidence level, repectively. The outcome o allocating FYM in arming i quite remote due to the eaonality in agriculture, orcing the impatient armer to witch away rom FYM arming. Thi reult i in perect agreement with other ew tudie that combine the time preerence experiment with ield obervation or better undertanding o ield behavior. The empirical tudy in Ethiopia (Shieraw and Holden 1998) ound a negative correlation between individual rate o time preerence and adoption o oil conervation technologie. In Brazil, ihermen who are impatient in a time preerence experiment exploit the ihing ground more (Fehr and Leibbrandt 2008); and in Sri Lanka people with higher rate o time preerence extract more non-timber oret product cauing depletion o oret reource (Gunatilake et al 2007). Table 3 alo provide everal actor that are plainly to play a determinant o the allocation o FYM among the dierent option. Concluion The caue o oil ertility depletion extend beyond the arm, receiving eect rom houehold economic condition in way diregard by mot economic model. Here, a undamental quetion in utainable reource management i the extent to which reource allocation i linked to market undamental and baic eature o armer preerence. A better undertanding o the determinant o armer FYM allocation i eential or inorming policie and program aimed at improving and maintaining oil management ytem. The return rom elling FYM will increae a the demand or bioma uel rie and upply decline. In Ethiopia, becaue o the continuou liting o ubidie and riing tari o keroene, and poor electricity inratructure and rapid population growth in the urban and peri-urban area, ale o FYM to the conumer in thee area eem promiing. Even though time preerence play a ubtantial role in invetment, a evidenced in thi tudy, the relationhip between other economic variable and time preerence a indicated by Holden et al (1998) i an important policy direction. Poor people are le patient are well documented (Holden et al 1998; Pender 1996; Tanaka et al 2010) uggeting economic development could inluence preerence. Poverty i playing important role in that poor armer are degrading the natural reource bae (Shively and Pagiola 2004) and poor are le likely to invet in environmental conervation (Holden et al 1998). The inluence o poverty i irrational becaue the preure o preent need blind a peron to the need o the uture (Becker and Mulligan 1997). Thi implie the appropriate policie targeted on poverty reduction can potentially reduce armer impatience. Reerence Becker G.S. and Mulligan C.B On the endogenou determination o time preerence. The Quarterly Journal o Economic. 112: Bezabih M Heterogenou rik preerence, dicount rate and land contract choice in Ethioia. Journal o Agricultural Economic. 60:

11 Breuch T.S and Pagan A.R The Lagrange Multiplier Tet and It Application to Model Speciication in Econometric. Review o Economic Studie. 47: Deaton A. and Muellbauer J Economic and conumer behavior. Cambridge Univerity Pre. NY. Fehr E. and Leibbrandt A Cooperativene and Impatience in the Tragedy o the Common. IZA Dicuion Paper No Univerity o Zurich. Fiher M., Shively G. and S. Buccola Activity choice, labor allocation and oret ue in Malawi. Land Economic. 81: Frederick S., Loewentein G. and O Donoghue T Time Dicounting and Time preerence. Journal o Economic Literature. 40: Gunatilake H.M., Wickramainghe W.A.R. and Abeygunawardena P Time preerence and natural reource ue by local communitie: The cae o Sinharaja in Sri Lanka. Economic and Reearch Department (ERD) Working Paper Serie No Aian Development Bank Heckman J.J "Shadow Price, Market Wage, and Labor Supply," Econometrica. 42(4): Heerink N Soil ertility decline and economic policy reorm in ub-aharan Arica. Land Ue Policy. 22: Heltberg R., Arndt T.C. and Sekhar N.U Fuelwood conumption and oret degradation: A houehold model or dometic energy ubtitution in Rural India. Land Economic. 76: Holden, S.T., B. Shieraw & M.Wik Poverty, Market Imperection and Time Preerence: o Relevance or Environmental Policy? Environment and Development Economic, 3: Jacoby H.G Shadow wage and peaant amily labor upply: An Econometric application to Peruvian Sierra. Review o Economic Studie. 60: Kaie M., Zikhali P., Manjur K. and Edward S Adoption o Organic Farming Technique Evidence rom a Semi-Arid Region o Ethiopia. Dicuion paper erie. Environment or Development. ED DP Reource or the Future, Wahigton DC. Lence S.H Uing conumption and aet return data to etimate armer time preerence and rik attitude. American Journal o Agricultural Economic. 82: Mekonnen A. and Kohlin G Bioma uel conumption and dung ue a manure: Evidence rom rural houehold in the Amhara region o Ethiopia. Dicuion Paper Serie. Environment or Development. ED DP Pender, J.L., Dicount Rate and Credit market: Theory and Evidence rom Rural India, Journal o Development Economic 50: Place F., Barrett C.B., Freeman H.A., Ramich J.J. and Vanlauwe B Propect or integrated oil ertility management uing organic and inorganic input: evidence rom mallholder Arican agricultural ytem. Food Policy. 28: Sadoulet E. and de Janvry A Quantitative Development Policy Analyi. The John Hopkin Univerity Pre. Baltimore and London. Shieraw, B. and Holden, S. T Reource Degradation and Adoption o Land Conervation Technologie in the Ethiopian Highland: A Cae Study in Andit Tid, North Shewa. Agricultural Economic 18: Shively G. and Fiher M Smallholder labor and deoretation: A ytem approach. American Journal o Agricultural Economic. 86: Shively G.E. and S. Pagiola Agricultural inteniication, local labor market and deoretation in the Philippine. Environment and Development Economic. 9: Skouia E Uing hadow wage to etimate labor upply o agricultural houehold. American Journal o Agricultural Economic. 76: Tanaka T., Camerer F., and Quang N Rik and Time Preerence: Linking Experimental and Houehold Survey Data rom Vietnam. American Economic Review. 100: Yeu M., and R.A. Blutone Poverty, Rik Averion and Path Dependence in Low-Income Countrie: Experimental Evidence rom Ethiopia. American Journal o Agricultural Economic. 91: Zellner A An eicient method o etimating eemingly unrelated regreion equation and tet or aggregation bia. Journal o the American Statitical Aociation. 57:

12 Table 1. Mean (tandard deviation) or FYM hare by purpoe and location Purpoe North Shewa Wet Shewa Eat Shewa Total FYM produced (ton/annum) 9.33 (8.18) (16.69) 6.98 (10.11) 9.17 (10.57) Farming (m ) 0.27 (0.26) 0.32 (0.20) 0.46 (0.23) 0.34 (0.25) Selling (m ) 0.42 (0.27) 0.36 (0.25) 0.31 (0.23) 0.38 (0.26) Houehold Energy (m e ) 0.31 (0.25) 0.31 (0.24) 0.23 (0.22) 0.28 (0.24) Number o obervation Table 2. Deinition, mean and tandard deviation o variable ued in the regreion Variable Decription Mean Std. Dev. OUTVALU Total output value (2006 ETB) p Predicted hadow price o FYM or arming, ETB/ton p Predicted hadow price o FYM or elling, ETB/ton DISCOUNT Farmer dicount rate ZONE-1 Dummy: i location i north Shewa 0.42 ZONE-2 Dummy: i location i wet Shewa 0.15 SEX Dummy: 1 i male headed houehold 0.88 MARITAL Dummy: 1 i married 0.86 EDUCATON Year o education AGE Age o the houehold head, yr FAMLYSIZ Total amily ize (in adult equivalent 5 ) MALFAMLSIZ Male amily ize (in adult equivalent) FEMFAMLSIZ Female amily ize (in adult equivalent) FERTILIZER Inorganic ertilizer applied, kg FERTEXPEN Total expenditure on commercial ertilizer, ETB BULOCK Bullock ervice, hr SEED Seed ued, kg FARMLABR Labor or arming, hr CROPAREA Cropped area, ha MODERNVAR Fraction o area with modern crop varietie PRIVATGRAZ Private grazing area, ha COMPOUND Size o the compound/garden (q. meter) EXTNFREQ Frequency o extenion contact per month DEMONVISIT Dummy 1: i ever viited demontration ield 0.41 DISTFARM Average ditance rom home to arming plot, hr DISTMKT Ditance to market ROTATION Fraction o area rotated with legume crop GOODSOIL Fraction o area with good quality oil EQUB Dummy: 1 i participated on rotating aving and credit club 0.44 DONKEY Number o donkey owned OFFINCOM Oarm income, ETB TLU Herd ize (in TLU 6 ) KEROSEN Annual expenditure on keroen, ETB TREE Number o tree owned STOVUSE Dummy: 1 i ue energy aving tove Adapted the Amterdam cale (ee Deaton and Muellbauer 1980) 6 1 TLU (which equal 250 kg body ma) = 1 cattle = 6.67 heep/goat = 1 hore = 1.15 mule = 1.54 donkey = 0.87 mule = 200 poultry 10

13 Table 3. Maximum likelihood etimate or FYM allocation Variable Farming Selling Energy Coeicient Std. Err. Coeicient Std. Err. Coeicient Std. Err. CONSTANT 5.608*** *** n p n p * *** *** * DISCOUNT * ** OFFINCOM (10-3 ) ** AGE *** AGESQR (10-3 ) * SEX ** ** MARITAL *** MALFAMLSIZ FEMFAMLSIZ 0.025* EDUCATION 0.006* *** FERTVALU (10-3 ) *** *** ROTATION *** DISTMKT * DISTFARM DONKEY *** CROPAREA *** PRIVATGRAZ 2.562* COMPOUND 0.870*** ** KEROSEN (10-3 ) ** TREE (10-3 ) TLU 0.023*** *** STOVUSE *** *** ZONE *** *** ZONE * * χ 2 (25) p-value Obervation

14 Annex 1. Structure o the time preerence experiment and armer dicount rate Intruction: We would like to know your preerence about taking wheat grain now compared with a wheat grain ater a year. Pleae indicate or each o the ollowing certain number o choice, whether you would preer the maller amount o wheat to receive now or the bigger amount o wheat to take later one year rom now. For intance, which one would you chooe: 50 kg wheat now or 65 kg wheat exactly ater one year? Nominal Size in kg o wheat Rate o time preerence* Dicount Rate Cla Choice Now (p) 12 month () (δ), % Almot neutral Slight Moderate Intermediate Severe Extreme *The implicit one-year dicount rate: n p Figure 1. Farmer dicount rate repone or uture value equivalent 12