Resource Allocation and Risk: A Case

Study of Smallholder Agriculture

in Kenya
Jerome M. Wolgin

A model of economic behavior under conditions of uncertainty demonstrates that the

traditional tests of economic efficiency in agriculture are generally misspecified. A data
set from Kenya is used in testing a risk-aversion model; the results permit the following
conclusions. Risk plays an important role in farmer decision making; farmers are
efficient in their allocation of resources; and lack of credit availability is a major
bottleneck in obtaining increased agricultural productivity for the regions studied in

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Kenya.

Key words: resource allocation, risk-aversion, Kenya, agricultural development.

Ever since Schultz suggested that peasant ag-
riculture might, indeed, be efficient within the
context of traditional technology and factor
availability, a substantial amount of research
has been undertaken to test this hypothesis.
For if it is true that peasants act "rationally,"
then it follows that growth in agricultural pro-
ductivity can be achieved by increasing factor
availability and providing new technologies,
and one might worry less about the more in-
tractable problems of peasant values and at-
titudes (Nair).
Most of the literature on allocative effi-
ciency in agriculture tests efficiency by deter-
mining whether the ratio of the mean marginal
product of any input is equal to the input
price. By such a measure, most studies have
found peasant farmers to be reasonably
efficient (Chemareddy, Hopper, Massell,
Massell and Johnson, Sahota, Yotopoulos).
Even Dillon and Anderson, in an article gen-
erally critical of the methodology employed in
this area, concluded that using a probabilistic
technique does not change this conclusion.
It is the purpose of this paper to show that
such a test of allocative efficiency is misspec-
ified if farmers are making their decisions in
Jetome M. Wolgin, on leave from the Department of Economics
at Wayne State University, is a Ford Foundation specialist in
economics at the Institute of Administration, University of Ife,
Nigeria.
This paper is based upon the author's Ph. D. thesis. Special
thanks are due to Professors Gustav Ranis and Thomas Birnberg,
Yale University, Professor Dirk Stryker, The Fletcher School of
Law and Diplomacy, and the author's colleagues, Professors
Douglas S. Paauw, Hossein Askari, and Steven Pease. Any er-
rors are the author's responsibility.
the presence of risk, and that small-scale
farmers in Kenya, under conditions of uncer-
tainty, behave as efficient, risk-averse entre-
preneurs.
Agriculture in Kenya: The Setting
Because of its colonial heritage, Kenyan ag-
riculture has historically been divided into two
sectors-large-scale farms which were at one
time called Scheduled Areas and from which
Africans were prohibited and small-scale
farms which were located in areas reserved
solely for Africans. It is with this latter sector
that this study is concerned.
One of the peculiarities of the farms within
the small-scale sector is that they are in transi-
tion from subsistence to commercial farming.
The basic crops are dairy products, produced
by native grades of cattle, and maize, up to
90% of which is consumed on the farm and
never enters the market economy. At the
same time and in growing quantities, Kenyan
farmers also produce coffee, tea, pyrethrum,
and pineapples, all of which are cash crops.
Thus, all small-scale farmers have to decide
what combination of cash and subsistence
crops to produce.
There are four primary factors in agricul-
tural production-hind, labor, capital, and
purchased inputs. Of these, land, most labor,
and some capital can be classified as tradi-
tional inputs owned by the farmer for which
there are few well-defined markets; the rest
Wolgin
are modern inputs and their availability de-
pends on the market structure. The bulk of
inputs into Kenyan agriculture fall in the
former category (Wolgin, pp. 28-29). This im-
plies that to some extent at least, the total
quantity of agricultural inputs are limited,
especially in the short run (crop-year). Cer-
tainly this is true of such traditional factors as
capital (native grades of livestock, buildings,
some tools) and land. With respect to labor,
for which somewhere between 10% and 20%
of all inputs are purchased off the farm, the
situation is somewhat more flexible. How-
ever, the availability of hired labor is limited in
peak seasons, since tribal prejudices tend to
discourage in-migration of alien workers from
areas which may be experiencing a period of
slack (Ominde).
For other inputs markets are better articu-
lated, although there are indications that some
degree of monopoly prevails (Kenya 1966).
The critical problem facing the ambitious
farmer, i.e., the farmer who is attempting to
expand production or undertake innovations
and upgrading of his capital stock, is the scar-
city of short-term and medium-term credit.
Agricultural credit in Kenya, in accordance
with the policy emphasis given to closure, re-
settlement, and land registration, has largely
been directed toward long-term loans for land
purchase. Loans of the medium term for capital
equipment (especially improved breeds of
dairy cattle) and for the crop year for current
expenses such as fertilizer and wages have
been given low priority (Kenya 1971, pp. 118-
19). As will be shown, this limited capital
availability has been an important factor in
inhibiting agricultural growth.
Climate and ecological conditions in Kenya
vary widely across space and time. The varia-
tion across space leads to the presence of a
number of different ecological zones within
which agricultural possibilities are similar.
The sample which we will be using in this
study has been divided into four strata on the
basis of differing ecologies and cropping pos-
sibilities, following a scheme presented by
Clayton. But it is the climatic variation across
time which makes Kenyan agriculture so un-
certain; at least one year in ten is a flood year
and two years in ten have at least locally se-
vere drought (Wolgin, p. 19). Thus maize, the
basic subsistence crop, is in surplus some
years and in deficit in other years. It is this
uncertainty with respect to weather conditions
that makes resource allocation decisions so
Resource Allocation and Risk in Kenya 623
difficult for Kenyan farmers, and makes inap-
propriate any study of the decision-making
process which fails to take into account the
question of risk.
A Neoclassical Model of Farmer
Behavior in Kenya
It is not necessary to trace the development of
the neoclassical model of behavior under con-
ditions of uncertainty (Arrow), but its main
features can be outlined briefly. The decision
maker is assumed to have a utility function
with one argument, income, which is itself a
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random variable with a known distribution.
The decision rule, maximize expected utility,
can be derived from a set of more basic as-
sumptions relating to the transitivity and con-
tinuity of the utility function (Von Neumann
and Morgenstern).
More concretely, consider the choices fac-
ing a farmer in Kenya. He possesses a set of
resources (land, labor, capital, and purchased
inputs) that can be used as inputs into a set of
production processes, each of which has an
uncertain outcome. Thus, this farmer, for
whom risk is an important consideration, will
maximize his expected utility rather than his
expected income. By putting some plausible
restrictions on both the utility function and the
distribution of income, it becomes a rather
simple problem analytically to arrive at that
allocation of resources which is optimal.
Let us introduce the following notation:
Y = income in shillings,
Qi = output in physical terms of crop i,
i = 1,2,
Q/ = expected output of crop i, i = 1, 2,
Pi = nonrandom component of the price of
crop i, i = 1, 2,
F, = family-owned inputs used in crop i,
i = 1, 2,
F, = total availability of family-owned in-
puts,
Xi = purchased inputs into crop i, in shil-
lings, i = 1, 2,
S, = marginal increment to risk of in-
creased production of crop i, i = 1, 2,
u, = random component of output, distrib-
uted with a mean of 1, and a finite
variance, i = 1, 2,
Vi = random component of price, distrib-
uted with a mean of 1, and a finite
variance, i, = 1, 2,
624 November /975 Amer. J. Agr. Econ.

U y2 = the variance of total income,
Uij = the covariance of income between
crop i and crop j, i, j = 1, 2,
Ak = Lagrangian multipliers, k = 1, 2, 3,
g, h = production functions for crops 1 and
2 respectively, and
g h hi = first derivatives of the respective
functions with respect to the ith argu-
ment, i = 1, 2.
Let the farmer's utility function V, which is
continuous and twice differentiable, have the
normal property of decreasing but positive
marginal utility of income, i.e., let U ' > 0 and
U" < O. Given the function V, one only needs
to know the distribution of Y, income, to have
all the necessary information. Suppose, for
imation not only provides a distribution, the
moments of which are known, but it allows us
to consider only the first two parameters of the
distribution of Y and thus considerably sim-
plifies the analytical presentation (Tobin
1958).
Since maximizing expected utility involves
only the first two moments of the distribution
of Y, the following relationship holds:
(6) max E(U(Y)) ~ to max U*(Ye , u y 2)
where U*l > 0 and U*2 < O.
It is also possible to simplify notation some-
what" by allowing:
(7) Uij = cov u.u, + COV ViVj
+ cov u.u,

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COV ViVj'
example, that there are two crops whose phys-
ical outputs, Q1 and Q2' are given by the fol- Then,
lowing production functions: (8) u y 2 = P12Q1e2u12 + P22Q2e2u22
(1) + 2P1P2Q1eQ2eU12'

and It is also necessary to introduce a constraint

limiting the total availability of family-owned
(2) Q2 = h(F2, X 2) U2' inputs:
If the prices of the two crops are given by (9) r, = r, + F 2•
P1V1 and P2V2 respectively, then net income,
Y, is given by Then, the objective function (in the two-crop
case) with all its constraints is given by
(3) Y = P 1g(F1, X1)U1V1
+ P 2h(F2, X 2)U2V2 - (Xl + X 2) (10) E(U(Y)) = U*«P 1Q1 e + P 2Q2 e
- (Xl + X 2)), (P 12Q{2U12
with Ul' U2' Vl, V2 all positive. Outputs Ql and + P22Q2e2u22
Q2 are made up of stochastic and nonstochas- + 2P1P2Q1eQ2eU12))
tic parts with the respective expected values + Al(Qle - g(F 1,X1))
given by + A2(Q2e - h(F2,X2))
(4) E(Q1) = Qle = g(F b Xl);
+ Aa(Ft - F\ - F 2 ) .
e
E(Q2) = Q2 = h(F2, X 2). Maximizing equation (10) with respect to
Similarly, the expected prices are the nine choice variables (Q1e, Q2e, r; F 2, Xl'
X 2 , A1 , A2' Aa) and eliminating the Ak'S pro-
(5) E(P 1V1) = P 1; E(P 2V2) = P 2. duces the following first-order conditions:
Let it be assumed that U1 and U2 are each U\P 1+ U*2(2P12Q1eU12
independent of both V1 and V2; in other words, + 2P1P2Q2eU12) - U*dg2 =0
the random disturbance that affects price has U*lP2+ U*2(2P22Q2eU22
no effect on output and inversely.' It will also + 2P1P2Q1eU12) - U*dh 2 =0
be assumed that the joint distribution of the gl h2- g2h1 = 0
Ui'S and Vi'S can be approximated by a mul- (11) Q1e- g(F 1,X1) =0
tivariate normal distribution." Such an approx- Q2e- h(F2,X2) =0
Ft- F1 - F2 = O.
1 Only in the case of pyrethrum is this assumption questionable.

For all other export crops Kenya is too small a producer for its
output to affect world prices, and for locally marketed crops
prices are set before the planting season.
2 Since the range of u, and Vj is limited to positive values and
their mean is unity, it would seem reasonable to assume that these
random variables are distributed log-normally (Feldstein). This
presents very serious problems, as the joint distribution of a linear
As a background against which to discuss
the implications of these first-order conditions,
theory, which states that any distribution with finite variance can
be approximated by a normal distribution with the same moments.
3 This is possible because of the assumption concerning the

combination of log-normal variates (Y) is not, in general, known. independence of the stochastic elements affecting price and out-
Thus, we take refuge in the central limit theorem of probability put.
Wolgin
it is useful to review the conclusions of the
theory of the firm in a world of perfect certain-
ty. If firms act in such a way as to maximize
profits, the following conditions must be met:
(a) the marginal value product of any input
equals its price, and therefore, (b) the ratio of
the marginal physical products of any two in-
puts equals the price ratio of those inputs, and
(c) the marginal value product of any input in
any two uses are equal.
From the third equation of equation (11), it
is clear that the second condition holds in our
model. However, as will now be dem-
onstrated, if the farmer is risk-averse, the
first and third conditions for profit maximiza-
tion will not in general hold in an uncertain
world. Taking the ratio of the first two equa-
tions of equation (11) we get
(P 1g 2 - 1)
(12)
(2P22Q2eai + 2P 1P2Q1e(12)
Define the following:
51 = 2P12Q1eul + 2P1P2Q2eU12
(13)
52 = 2P22Q2eU22 + 2P1P2Q1"a 12'
Then 51 equals the partial derivative of u/
with respect to Q1e, and 52 equals the partial
derivative of o y2 with respect to Q2e, i.e., 51
and 52 represent the marginal increments to
risk of increased production of crops 1 and 2,
respectively. If 51 is greater than 52' then crop
1 is riskier than crop 2. In any case,
(14) P 1g 2 ~ P 2h 2 as 51 ~ 52'
Equation (14) states that the marginal value
product of any input into activity i is greater
than, equal to, or less than the marginal value
product of the same input into activity i. as the
marginal increment to risk of increased pro-
duction of commodity i is greater than, equal
to, or less than the marginal increment to risk
of increased production of commodity j. This
result is analogous to that of portfolio-choice
theory where investors who choose riskier as-
sets expect higher returns (Markowitz, Tobin
1965).
A testable corollary of this proposition is
that a ranking of crops by their marginal in-
crements to risk (5a should be identical to a
ranking of the marginal value products of any
Resource Allocation and Risk in Kenya 625
allocatable input across crops. This condition
for economic efficiency, coupled with the
profit-maximizing condition of the equality of
the marginal physical products of any pair of
inputs in each of two uses, makes it possible to
test whether the behavior of the small-scale
farmer in Kenya is consistent with the model
propounded above.
Data and Estimation Techniques
Ideally, the model which is to be estimated
requires a cross-section time series of mi-
crolevel data on inputs, outputs, and prices.
With such a data set, information would be
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available to estimate not only cross-section
production functions but also to measure di-
rectly the random disturbances affecting price
and output as perceived by the farmer. Unfor-
tunately, such a data set is unavailable at this
time. What is available is a cross-section,
farm-level series on inputs, outputs, and
prices, and an aggregated, district level time
series on marketed output and prices to the
producer.
In broad outline, the basic set of data to be
used in estimating agricultural production
functions in Kenya is the Small Farm Sample
Costs Survey (SFSCS) conducted in 1969-70
by the Statistics Division of the Ministry of
Finance and Economic Planning of the Re-
public of Kenya. The SFSCS is a stratified
random sample taken in the most important
agricultural areas of Kenya, conducted by in-
terviewers on a monthly basis. There are
1,500 farms in the sample, and information
was recorded on 505 variables including such
items as land devoted to each crop, labor in-
puts by crop, capital stock, nonfarm income,
fertilizer inputs, wage rates, output prices at
the farm gate, etc.
Once the data were edited (Wolgin, pp.
50-56), the sample was stratified into ecologi-
cal zones. Ecological zone 3 includes some of
the finest arable land in Kenya, suitable for tea,
pyrethrum, maize, and dairy. Most of the land
in this zone is located in the Western High-
lands around Kisii and across the great Rift
Valley. Zones 4 and 5 occur most often in the
Central Highlands on the slopes of Mt. Kenya
and the Abederes Range. The Kikuyu Grass
zone (4), which is at a higher altitude and
consequently gets more rain, is suitable for
coffee and tea as well as the subsistence crops
of maize and dairy. However, the uneven ter-
626 November 1975
rain makes these Central Highlands areas un-
suitable for large-scale farming. Zone 5 (star
grass) is a coffee-growing region. Zone 6 is a
conglomerate, including the low-lying areas of
the Lake Victoria littoral and the coastal belt,
an area of mostly subsistence farming with
some coffee and cotton. These areas are
among the poorest agricultural regions in
Kenya. Cobb- Douglas production functions
were then estimated for each crop for each
ecological zone, using the instrumental vari-
ables technique to correct for any simultane-
ous equations bias (Marschak and Andrews,
Nerlove, Walters).
In order to generate estimates for the Ui'S
and v/s, the following procedure was fol-
lowed. A Nerlovian adjustment-expectation
model was used to calculate estimates of the
nonstochastic components of price and out-
put, using district-level time series on price to
the producer and market output. The respec-
tive output and price equations" were
(15) qit = QOi + Qli t + Q2iPit-l + Uit
and
(16) Pit = bOi + blit + b 2iPit-l + Vit,
where qit = the natural logarithm of marketed
output of the rth crop at time t, t = time,
Pit = price of the rth crop at time t, Uit = the
random fluctuation of output of the ith crop,
Vi( = the random fluctuation of price of the ith
crop, and Qkh b k i = parameters, k = 1, 2, 3.
Results
The price and mean marginal value product
for each input for each crop by ecological zone
are presented in table 1. The most salient fea-
ture of table 1 is the divergence between the
marginal value product of any input and its
price. This should not be surprising, as a care-
ful analysis of equation set (11) indicates that
the difference between the marginal value
product of any input and its price depends on
the marginal increment to risk of the given
crop. In fact, of forty-seven marginal value
products presented in table 1 (excluding family
labor, for which no price is available), thirty-
seven are greater than the price of the corre-
sponding input. In the ten cases where the
reverse is true, all but one occur in the produc-
4 The assumptions underlying this specification of the output
and price equations as well as the resultant estimations can be
found in Wolgin, pp. 79. 116-20.
Amer. J. Agr. Ecan.
tion of the two subsistence crops-local maize
and unimproved dairy.
One possible explanation for this conun-
drum is the fact that in evaluating marginal
value products, the price to the producer for
maize and milk has been used. There are,
however, two prices for these subsistence
crops-a consumer's price and a producer's
price-and the wedge between them is sub-
stantial. Thus, a farmer who was risk-averse
might overproduce subsistence crops in order
to avoid the consequences of entering the
market to purchase milk or maize meal (Mas-
sell and Johnson). Using consumer prices
would reverse the inequalities for seven of
these anomalous cases.
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The second interesting feature of table 1 is
that the ratio of marginal value product to
price is much higher for marketed inputs than
for family-owned inputs. The mean marginal
value products of family labor are extremely
low. This is not surprising for, although
Kenya is not a labor surplus economy in the
same sense that many countries in Southeast
Asia may be, there are few alternative oppor-
tunities for employment off the farm, and the
opportunity cost of family labor throughout a
crop year may be very low.
This presents something of a paradox, since
hired labor clearly has a much higher marginal
product. While some of this differential be-
tween hired and family labor may be due to
quality differences, the bulk probably can best
be explained by the peculiar seasonality of
input use in agriculture. Hired labor is used in
seasons of great labor demand (planting and
harvesting) and therefore has a much higher
return.
The marginal value product of purchased
inputs is in almost every case higher than its
price. This is also true for capital, except in
the case of unimproved breeds of dairy cattle. 5
In fact, the returns to capital goods are ex-
tremely high (often on the order of ten times
the price of capital services), and this suggests
that one of the key bottlenecks to increasing
agricultural production among small farms in
Kenya is lack of credit availability. This takes
two forms-short-term credit for the purchase
of inputs used during the crop year (fertilizers,
hired labor, dips, feeds, etc.), and longer-term
credit for the purchase of capital goods (par-
ticularly improved breeds of dairy cattle). As
5 The low marginal value product for unimproved grades of
dairy cattle may reflect the importance of cattle as a consumption
good in East African cultures.
Wo/gin Resource Allocation and Risk in Kenya 627

Table 1. Mean Marginal Value Products and Prices for Agricultural Inputs in Kenya, 1969-70
(Shillings per Unit Input)
Zone 3 (balanced mixed farming):
Mean Marginal Value Product by Crop

Local Hybrid Pyreth- Improved Unimproved

Input Maize Maize rum Dairy Dairy Price

Acre of land 157.95 218.73 63.59 93.10 77.27 41.20

Man-day of
family labor 0.85 0.56 4.95 0.59 0.27
Man-day of
hired labor 7.03 15.48 12.18 3.50
Shilling of
purchased input 1.44 3.27 3.45 0.28 1.00
Shilling of capital 1.23 1.89 0.33 0.08 0.12

Zone 4 (kikuyu grass):

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Mean Marginal Value Product by Crop

Local Improved
Input Dairy Coffee Tea Dairy Price

Acre of land 13.95 101.50 363.12 101.61 28.24

Man-day of
family labor 0.70 2.13 9.86 1.84
Man-day of
hired labor 1.87 1.47 2.46
Shilling of
purchased input 7.06 4.30 4.22 1.00
Shilling of capital 1.13 0.60 0.12

Zone 5 (star grass):

Mean Marginal Value Product by Crop

Local Hybrid Unimproved

Input Maize Maize Cotton Coffee Dairy Price

Acre of land 39.28 86.09 92.38 110.78 33.64 39.84

Man-day of
family labor 0.66 1.04 0.43 0.84 0.26
Man-day of
hired labor 0.20 4.11 1.58
Shilling of
purchased inputs 1.07 2.78 1.37 0.88 1.00
Shilling of capital 0.37 2.54 0.09 0.12

Zone 6 (grass plains, savannah, coastal belt):

Mean Marginal Value Product by Crop

Input Local Maize Uni mproved Dairy Price

Acre of land 19.25 30.86 26.64

Man-day of family labor 0.33 0.15
Man-day of hired labor 3.86 3.11
Shilling of purchased input 2.57 1.05 1.00
Shilling of capital 0.60 0.48 0.12

Source: Raw data were obtained from the Statistics Division of the Ministry of Finance and Economic Planning of the Republic of
Kenya.
Notes: One Kenya shilling equals O.14¢, U.S. For land and capital, an estimate has been made of the value of current services, using an
8% interest rate. For crops, the capital input is measured as the value of tools, while for dairy products, the capital input is the value of
the respective livestock. Where no number is entered in the table, there were too few observations for reliable estimates.
628 November 1975 Amer. J. Agr. Econ.

mentioned above, credit in Kenya has been
provided mainly for the purchasing of land
which, while it has important redistributional
effects, has a negligible impact on increasing
agricultural incomes.
The proposition was advanced that if farm..
ers are risk-averse, the marginal value prod-
ucts of any inputs across crops will not be
equal but will depend on the marginal incre-
ment to risk of each crop. This implies that the
ranking of the marginal value products across
crops will be identical for all inputs. While the
data in table 2 are not completely appropriate
for testing this proposition, they should pro-

Table 2. Rankings of Marginal Value Products by Crop, by Ecological Zone

Zone 3 (balanced mixed farming):
Crop

Local Hybrid Improved Unimproved

Input Maize Maize Pyrethrum Dairy Dairy

Land 215 3 4

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Family labor 2 4 1 3 5
Hired labor 4 1 2
Purchased inputs 4 2 3 5
Capital 3 2 4 5

Coefficient of variation 0.3 0.2 0.8 0.2 0.1

Zone 4 (kikuyu grass):

Crop

Local Improved
Input Maize Coffee Tea Dairy

Land 4 2.5 2.5

Family labor 4 2 3
Hired labor 2 3
Purchased inputs 2 3 4
Capital 2 4

Coefficient of variation 0.4 0.2 o 0.2

Zone 5 (star grass):

Crop

Local Hybrid Unimproved

Input Maize Maize Cotton Coffee Dairy

Land 4 3 2 I 5
Family labor 3 1 4 2 5
Hired labor 4 2
Purchased inputs 4 2 5
Capital 4 5

Coefficient of variation 0.1 0.5 0.3 0.2 0

Zone 6 (grass plains, savannah, coastal belt):

Crop

Local Unimproved
Input Maize Dairy

Land 2 1
Family labor 1 2
Hired labor 1
Purchased inputs 1 2
Capital 1 2

Coefficient of variation 0.3 0.2

Wolgin
vide some indication of whether these expec-
tations are likely to be fulfilled," that is, one
would expect the ranking of coffee marginal
value products to be the same for labor as it is
for land. These rankings are presented in table
2.
While the results presented in table 2 are not
completely satisfactory, they are consistent
enough to indicate the ordering of crops on the
basis of the marginal value product. In only
three of the sixteen cases was the coefficient
of variation greater than 0.3, and in only one
case was it greater than 0.5. The failure of the
production function results to provide a con-
sistent ranking across all inputs can be as-
cribed to the various constraints which limit
the farmer's ability to freely allocate resources
in the short run.
It was argued above that the only profit-
maximizing test of economic efficiency that
holds, once uncertainty has been introduced,
is that the ratio of the marginal products of any
two factors into a given crop i should be equal
to the ratio of the marginal products of those
same two factors into any other crop j. In
order to test this proposition, the sample was
divided into eighteen subsamples representing
different cropping patterns. For example, all
farms in zone 3 producing only maize, coffee,
and improved dairy were separated into a sub-
sample and tested for the equality of any pair
of ratios of marginal products. In particular,
the factors chosen were those over which the
farmer had some freedom of allocation in the
short run-land/family labor for those crops
which are produced annually and family
labor/hired labor and family labor/purchased
inputs where otherwise appropriate.
These ratios were then tested by means of
paired t-tests to determine if the sample means
6 The appropriate samples for testing this proposition are farms
with identical cropping patterns. This is because risk is a property
of a portfolio rather than of a particular crop. Accordingly, this
proposition will be tested more rigorously below.
Table 3. Results of the Profit-Maximizing Test of Economic Efficiency
Input Pair
Land/family labor
Family labor/purchased inputs
Family labor/hired labor
Total
Percentage of total
Resource Allocation and Risk in Kenya 629
of any pair of ratios were significantly differ-
ent from each other. The results are pre-
sented in table 3. Although interpretation of
these results involves some degree of subjec-
tivity, it seems fair to state that farmers in
Kenya are relatively efficient in their alloca-
tion of resources among crops.
It has also been argued in equation (14) that
the higher the marginal value product, the
higher the marginal increment to risk and con-
versely. To test this proposition, it is neces-
sary to examine the same subsamples that
were used in testing allocative efficiency.
There are eighteen of these subsamples of
identical cropping patterns; of these nine
groups grow only two crops, another six grow
Downloaded from http://ajae.oxfordjournals.org/ at kingstonuni on May 25, 2016
three crops, and three grow four different
crops. Altogether this means that there are
forty-five possible pairings of crops; of these,
thirty-nine exhibited behavior consonant with
the model, i.e., the crop with the higher mar-
ginal value product also had the higher margi-
nal increment to risk. These results are pre-
sented in table 4.
Thus it is clear that risk aversion plays a
very important role in farmer behavior; farm-
ers are willing to grow high risk crops only if
they get a higher payoff in expected return.'
Moreover, risk aversion may help explain
why farmers are interested in multicropping
(assuming no joint production). By producing
a mutual fund of crops, they can get the same
range of expected return at lower levels of
risk, as they would if they grew only one crop
at a much higher risk level (Tobin 1965).
By fixing output prices, the government of
Kenya is already acting in such a way as to
minimize risk. However, if the random vari-
ables affecting price and output are correlated
negatively, such a policy may in fact be coun-
7 It should be noted that several of the assumptions underlying
this paper, particularly the specification of Cobb- Douglas produc-
tion functions, are somewhat restrictive. Accordingly, the conclu-
sions may not be as robust as indicated.
Number of Cases Where Ratio of Marginal
Products of Given Input Pair Are:
Equal across Unequal across
Two Crops Two Crops
25 4
13 3
6 0
44 7
86.3 13.7
630 November 1975 Amer. J. Agr. Econ.

Table 4. Results of Test of Risk Aversion and Economic Efficiency

Number of Cases for Any Two Crops:

Number of Crops Marginal Increment Marginal Increment
Grown in Sub- to Risk Ranked to Risk Not Ranked
sample Identically with MVP Identically with MVP

2 8 1
3 16 2
4 15 3

Total 39 6
Percentage of total 86.7 13.3

terproductive. Most importantly, if farmers Kenya, Republic of. Report of the Maize Commission of
are risk-averse and are unable to produce op- Inquiry. Nairobi: Government Printer, 1966.
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