Production and Productivity Effects of Informal Contract Farming in Kenya's Smallholder Horticultural Sub-sector

Abstract

This paper uses data from a 2001 household survey of small-scale farming households in Kirinyaga District, Kenya to explore production effects of informal credit contracts in French bean farming where formal markets for surplus production are seemingly shallow and imperfect. Specifically, it examines whether informal arrangements spur productivity and intensity of inputs use. A three stage least square (3SLS) modelling strategy is used to quantify the direct and indirect effects of contracts on French bean output conditional upon infrastructure, institutional and farmer-specific socio-economic factors. The results show that fertilizer, pesticides and High Yielding Variety seeds use, and French bean output price have direct positive and significant effects on productivity. On the other hand, the period under contract negatively and significantly affect productivity. Indirectly, however, informal contract - proxied by credit value - and farm size positively influence productivity through significant variable input use intensity whereas the input market prices negatively and significantly influence variable input demand. Policy implications are drawn. Keywords: Contract farming; smallholders; horticulture; productivity; Kenya Eastern African Journal of Rural Development Vol.19(1) 2003: 13-24