RESOURCE ALLOCATION UNDER RISK: THE CASE OF SMALLHOLDER FARMERS IN ROBE WOREDA, ARSI ZONE OF ETHIOPIA

The present study was carried out with the objectives of understanding the existing resource allocation practice, the possibility of increasing farm income through optimal allocation of resources under risk situation, and to develop risk efficient sets of farm plans for representative households based on cross-sectional data drawn from 155 households who were selected using stratified multi-stage random sampling technique during the 2015/16 production year. The results of descriptive analysis show that most of the socioeconomic variables were found to be significantly different among the three agro-ecologies. An examination of the existing farming practice of the study area shows that the main sources of income for the households are from on-farm activities. MOTAD risk programming model has been chosen as an appropriate optimizing tool to examine resource allocation decisions of the smallholder households in the study area. From the results of the model, Sustainable plans within which households can minimize risks and remain efficient are suggested for the three identified agro-ecologies. The model results also show that, in all agro-ecologies under risk neutral plan, there is substantial difference between households’ existing plan and gross income maximization plan implying that if farm households reallocate their resources among different activities, there is a much room to increase their income under risk neutral plan. On the other hand, even though farm households have no more room to increase their income under risk efficient farm plans, they can minimize income instability and can meet their multiple objectives. The analyses also reveal that land and working capital in both highland and midland, and land in lowland are the most limiting constraints to optimal production at farm level. The non-binding resources utilization increase across the plans implying that there is a need for reallocation of the resources among different enterprises