System Generalized Method Of Moments Estimator Research Articles

Conflict or coordination? The cross-departmental interaction in local environmental governance of China

Organizational coordination has been regarded as a vital factor to determine the environmental governance efficiency of local authority, while existing empirical studies mainly discuss the vertical decentralization but largely ignore the horizontal cross-departmental interaction within single government. Based on the data of 31 Chinese provinces from 2003 to 2017, this paper uses a panel vector autoregression (PVAR) approach, two-way fixed-effect models and dynamic panel regression with system generalized method of moments estimation (SYS-GMM) to investigate the environmental strategic interaction between two representative departments (finance department and environmental protection department) within local governments. The results indicate, on the whole, their environmental governance strategies show a significantly co-directional coordination. However, the cross-departmental interaction obviously varied in different periods and regions (even showed as conflict sometimes), and was synchronized with the dynamic trade-off between economic and environmental targets of China. This research helps understand the inner logic of environmental governance of Chinese government, and can be valuable guidance for other countries to accomplish multi-departmental sustainable development goal.

Does corporate social responsibility mediate the relationship between board diversity and financial distress: evidence from an emerging economy?

PurposeThe study hypothesized that the impact of board diversity on financial distress (FD) is not direct but rather mediated by the firm’s corporate social responsibility (CSR) activities. Consequently, the purpose of this study is to examine the impact of CSR as a mediator in the board diversity–FD relationship.Design/methodology/approachThe study examined six board diversity dimensions – age, gender, nationality, education and tenure in 81 nonfinancial Pakistan Stock Exchange (PSX)-listed firms from 2010 to 2021. The CSR engagement of the sample firms is evaluated using a multidimensional financial approach and the likelihood of FD is computed using Altman’s Z-score. The system-generalized method of moments estimator is used to meet the study objectives. In addition, several tests are run to determine the robustness of the study’s findings.FindingsBased on the procedure for mediation analysis outlined by Baron and Kenny (1986), the authors found that CSR is significantly inversely associated with the likelihood of FD. Second, board diversity variables age, gender and national diversity were positively associated with CSR. Third, board age, gender and national diversity are significantly inversely related to FD. Finally, it was found that there is partial mediation between board age diversity and FD, whereas full mediation is shown between board age diversity and FD and between board nationality diversity and FD.Practical implicationsThis study provides practical insights into PSX’s board diversity for companies, regulators and policymakers.Originality/valueThis research studies the connection between board diversity and FD. In addition, the current study extended the analysis by testing for the first time the mediating role of CSR in the diversity–distress relationship, particularly in the context of an emerging economy.

Stimulus or Enforcement? How Intergovernmental Transfers Crowd-in Local Taxes in Indonesia

This study quantifies intergovernmental transfers’ contemporaneous and lagged effects on local tax revenues of districts/municipalities in Indonesia. This study found that transfer as aggregate and unconditional transfers/ Dana Alokasi Umum have crowding-in effects on local tax revenues. Meanwhile, revenue sharing/ Dana Bagi Hasil and conditional transfers/ Dana Alokasi Khusus do not significantly affect the tax revenues of districts/municipalities. In addition, system-Generalized Method of Moments estimation results show that the contemporaneous effects of transfers are more prominent in magnitude than their lagged effects. It indicates that local tax enforcement due to transfers provides a larger portion than the local spending stimulus in determining local revenue increases. Our findings refute the negative stigma that emerged after implementing fiscal decentralization, particularly related to the disincentive effect of transfers on local government efforts to generate their revenues. Therefore, equitably endowing local governments with intergovernmental transfers will improve their accountability and build public trust.

Alternative general method of moments estimators in dynamic panel data models

The choice of initial weighting matrix and the problem of instruments proliferation are crucial issues in generalized method of moments (GMM) estimators of dynamic panel models. In this study, we propose alternative system GMM estimators that utilize suboptimal initial weighting matrices together with reduced instruments set (specifically lag-limited and partially collapsed instruments). Comparison of the performance of the proposed estimators against the conventional estimator was undertaken in terms of bias, root mean squared error (RMSE) and coverage probabilities through Monte Carlo simulations. Our simulation results revealed that sub-optimally weighted system GMM estimator adopting partially collapsed instruments outperforms the standard GMM estimator in terms of both bias and RMSE for large T and large variance ratios as the coefficient of the lagged dependent variable gets close to zero. Under these scenarios, the system GMM estimators based on reduced instruments were also found to perform well in terms of coverage probabilities. As the process approaches a random walk, however, there is no considerable gain from the use of suboptimal initial weights matrix and reduced instruments in general.

Corporate governance and risk management in Islamic and convectional financial institutions: explaining the role of institutional quality

PurposeThis study aimed at exploring the differential effects of different corporate governance (CG) indicators on risk management practices in Islamic financial institutions (IFIs) and conventional financial institutions (CFIs) of Pakistan. It also investigated the moderating role of institutional quality (IQ) in shaping the effects of CG practices on financial institutions of Pakistan.Design/methodology/approachA sample of 57 financial institutions including commercial banks, insurance companies and Modarba companies over the period 2006–2017 is used to carry out the empirical analysis. The authors applied the robust two-step system-generalized method of moments estimator, which is also called the dynamic panel data estimator. They also built the PCA-based composite index of CG and IQ by using different indicators to investigate the moderating role of IQ. They used three proxies for risk taking, five for CG and one for Shari’ah governance. To test the validity of the instruments, they applied the Arellano and Bond’s (1991) AR (1) and AR (2) tests and the J-statistic of Hansen (1982).FindingsThe results provided strong evidence that several individual characteristics of CG and the composite index are significantly related to the operational risk, the liquidity risk and the Z-score (a proxy for solvency risk). The results also revealed that IQ significantly and substantially contributes in reducing the level of risks. Finally, the estimation results indicated that the effects of CG on risk management are significantly different at IFIs and CFIs. This differential impact is mainly attributed to the fundamental differences in business models, operational strategies and contractual obligations of both types of institutions.Practical implicationsThe findings of this study are important for enhancing our understanding of how CG relates to risk taking in Islamic and conventional financial services industries and how good quality institutions are important for formulating the governance effects on the risk-taking behavior of financial institutions. The findings suggest that a suitable size of board should be chosen to manage the risk effectively. As the findings show that the risk-taking behavior of IFIs differs from that of CFIs, the regulators and international standard setting bodies should tailor the regulatory frameworks accordingly.Originality/valueThis paper is different from the existing studies in four aspects. First, to the best of the authors’ knowledge, this is the first empirical investigation in Pakistan, which does the comparison of IFIs and CFIs while examining the impacts of CG on risk management. Second, the paper constructs the composite index of CG by considering several different indicators of governance and examines the combined effect of governance indicators on risk management process. Third, this paper adds to the growing literature on the role of IQ by investigating whether it acts as a moderator between CG structures and risk management and if yes, then whether this moderating role is different for IFIs and CFIs. Finally, the paper builds upon the existing research work on the CG effects for different types of financial institutions by proposing a single regression based analytical framework for comparing the effects across two different types of institutions, harvesting the benefits of higher degrees of freedom and avoiding/minimizing the measurement error.

Leveraging digital technology for development: Does ICT contribute to poverty reduction?

The Sustainable Development Goal (SDG) 1 requires countries to end poverty of all forms. At the same time, SDG 9 target 9.c calls for increasing Information and Communication Technology (ICT) access and striving to provide universal and affordable access to the internet in the least developed countries by 2020. While the existing studies have explored the effect of ICT on economic growth, there is a limited empirical study on the effect of ICT on poverty reduction. This article, therefore, investigates the effect of ICT on poverty reduction using comprehensive panel data for 44 sub-Saharan Africa (SSA) countries from 2010 to 2019. Using the dynamic system-generalized method of moment estimator to control endogeneity, the findings show that telephone penetration, mobile phone penetration, and ICT goods imported contribute to poverty reduction, while internet penetration, broadband penetration, and ICT goods exported increase poverty rate regardless of gender and age group. The net effect estimates reveal that at the maximum value of most ICT variables, economic growth, income inequality, and access to credit significantly increase poverty rate regardless of the age group. We argue that for SSA to leverage ICT to drive economic prosperity, policies that seek to drive ICT availability and affordability should be supported with policies that ensure income redistribution, trickle-down development, and minimizing the cost of accessing credit.

Nexus between green finance, environmental degradation, and sustainable development: Evidence from developing countries

In this study, we aim to investigate the impact of green finance and environmental degradation on sustainable development in developing countries. We use a panel dataset for 42 developing countries for the 2000–2020 period employing the panel fixed effect estimation. Adjusted net savings are used to measure sustainable development, green credit, green securities, and green investments are applied as proxies for green finance, and carbon (CO2) emissions are used to indicate environmental degradation. The analysis reveals that green finance has a positive and significant impact, whereas environmental degradation exerts a negative and significant impact on sustainable development in developing countries. Further, we find the same outcomes by employing the system-generalized method of moments estimation, confirming the robustness of our results. Our study has implications for regulators and policymakers seeking to achieve sustainable development in developing countries. Our findings will be useful for designing policies related to green financing and investment in developing nations.

Impacts of Information and Communication Technologies infrastructure development on economic growth: An empirical study of Southeast Asian countries

This article aims to systemize growth models and analyze the impacts of Information and Communication Technologies (ICT) infrastructure development on the economic growth of Southeast Asian countries. Accordingly, growth models are developed with ICT inputs, including mobile cellular subscriptions, fixed telephone subscriptions, fixed broadband subscriptions, and Internet users. Using data from World Bank, the author collected 220 observations of 10 ASEAN members during the 2000-2021 period. To evaluate how ICT infrastructure factors affect the economies, the author used various panel analysis and estimation methods: Panel unit-root test, panel cointegration test, and the Generalized Method of Moments (GMM) estimator. The results showed that all the variables were stationary and had cointegration relationships. Additionally, the Ramsey test results showed that there were no omitted variables in the models, which proved the fitness of the models. The study found that 3 ICT variables significantly improved economic growth: mobile cellular subscriptions, fixed broadband subscriptions, and Internet users; while fixed telephone has negative effects on the sample. The author also found that economic growth is significantly improved by labor force, gross fixed capital formation, and trade openness. Theoretically, this article built a growth equation with a vector of different ICT factors, including Mobile cellular subscriptions, fixed telephone subscriptions, fixed broadband subscriptions, and Internet users. Furthermore, when using the system GMM estimator which controls bias such as endogeneity, heteroskedasticity and auto correlation, effects of explanatory variables on economic growth were significant. Practically, the research results provided an overview of the contributions of ICT factors to Southeast Asian economies, which are consistent with the current situation of ICT development in the region. From these results, the article gave policy implications for Vietnam in developing ICT aspects as well as in applying ICT in socio-economic activities.

The Impact of Services Quality on Electricity Theft Reduction: An Empirical Analysis of Electricity Distribution Utilities in Pakistan

This study investigates the socioeconomic, administrative, and service quality determinants of electricity theft in Pakistan. The effect of service quality standards on electricity theft is estimated using panel data fr om eight electricity distribution utilities from 2006 to 2018. The results of utilizing the One step system Generalized Method of Moments estimator confirm the statistically significant impact of social, administrative, and service quality variables on the illegal use of electricity. Based on the findings, Pakistan's National Electric Power Regulatory Authority is advised to take measures to improve the quality of services. In contrast, the nation’s Central Power Purchasing Agency is advised to improve admi nistrative structure by separating retail function from distribution by electric distribution.

Causality between Financial Development and Foreign Direct Investment in Asian Developing Countries

This study investigated the linkages between foreign direct investment (FDI) and financial development measured by banks and stock markets in 30 Asian developing countries from 1986 to 2019. We used a bivariate model with Granger causality tests to test the reverse causality between FDI and financial development and multivariate models with the system generalized method of moments (GMM) estimator to identify how one factor affected the other. Our Granger test results showed a bidirectional linkage between FDI and financial development. Using the system GMM estimator, we showed that greater financial development drew more inward FDI to host countries. Similarly, local financial markets benefited from FDI by improving capital mobilization and financial services and products to intensify economic activity. Our findings suggest that, to attract FDI, policymakers should improve local banks and the stock market environment with strong institutional backgrounds to enhance foreign investors’ confidence and provide incentives to increase cross-border investments in host economies.

Shocks, household consumption, and livelihood diversification: a comparative evidence from panel data in rural Thailand and Vietnam

We examine the roles of land and labor diversification in mitigating the effects of covariate and idiosyncratic shocks in the two middle-income countries Thailand and Vietnam. We use an unbalanced panel dataset of rural households obtained from five survey waves during 2007–2016 (9291 households for Thailand and 9255 households for Vietnam). We employ the System-Generalized Method of Moments estimators to control for endogeneity. Our study finds that (i) rural households in both countries are able to maintain per capita consumption in the face of idiosyncratic shocks but not covariate shocks; (ii) labor diversification in Thailand and land diversification in Vietnam are used as ex-post coping strategies against covariate shocks but their shock-mitigating roles are insignificant; and (iii) land diversification in Thailand and labor diversification in Vietnam are helpful in improving per capita consumption when households face covariate shocks. Our findings suggest that facilitating access to credit, enhancing farm mechanization, and improving road quality in Thailand as well as promoting the development of local rural nonfarm sectors in Vietnam would benefit rural households in dealing with covariate shocks.

A non-parametric framework for evaluating governance–efficiency–productivity associations in commercial banking

PurposeAgainst the backdrop of an Indian banking sector that finds itself entangled in the triple deadlock of increasing competition, technological changes and strict regulatory compliance, the study aims to examine the need for reinforcing stringent corporate and risk governance mechanisms as an instrument for improving efficiency and productivity levels.Design/methodology/approachThe authors construct three separate indices, namely, supervisory board index, audit index and risk governance index to measure the governance practices of commercial banks. A slacks-based data envelopment analysis technical efficiency (TE) measure, a variable returns to scale cost efficiency model and Malmquist productivity index are employed to determine TE, cost efficiency and productivity change, respectively. A two-step system-generalized method of moments estimation accounts for the dynamic relationship between governance and efficiency.FindingsThe authors show that strict audit and risk governance mechanisms are associated with better efficiency and productivity levels. However, consistent with the free-rider hypothesis, large, independent and diverse boards lead to cost inefficiencies. Strict risk governance structures circumvent the negative effects of high regulatory capital and improve efficiency and total factor productivity. However, friendly boards do not perform efficiently in the presence of regulatory capital, implying that incentives arising from maintaining high levels of equity capital make them more susceptible to risk-taking, and board composition is unable to sidestep this behaviour.Originality/valueThe paper contributes to the literature that explores the linkages between governance, efficiency and productivity. The inferences hold relevance in the post-COVID world, as regulators try to circumvent the additional stress on the banking system by adopting sound corporate and risk governance mechanisms.

The role of institutions in private investment: panel data evidence

PurposeThis study aims to examine the effects of institutions on private investment (PI) using panel data analysis, where the sample countries consist of 100 countries around the world and the time period is covering from 2007 to 2016. The system generalized method of moments (GMM) estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998) is used to analyze the data sets.Design/methodology/approachThis study uses the panel data approach to estimate the empirical model due to the panel nature of the data. In particular, due to the presence of lagged dependent variables and the ability to capture individual country-specific effects, the system GMM estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998), is adopted to analyze the roles of institutions in PI. The system GMM is developed specifically to solve the problems of weak instruments and persistency (Blundell and Bond, 1998). Jointly, they suggest to adopt additional moment conditions where lagged difference of the dependent variable is orthogonal to the level form of the disturbances. The system GMM estimator is able to combine the moment conditions for the different models, as well as the level model, thereby (is capable of) generate consistent and efficient parameters. Due to the dynamic nature of the data, this study uses one-step and two-step system GMM to investigate the roles of institutions in PI.FindingsThe empirical results based on the two-step system GMM demonstrate that the quality of institutions plays an important role in stimulating PI. The finding is reinforced by the analysis of the institutional sub-components’ effects on PI.Originality/valueThis study is unique as its measurement of institutions is multi-dimensional (including law and order, rules and regulation, government stability, bureaucratic quality, control of corruption, socio-economic condition, etc.), and hence are more comprehensive. Second, it is different than the previous studies as its sample of countries includes both democracies and non-democracies, as well as both developed and non-developed economies in which policy implications are widely acceptable. Third, this study contributes to the policymakers especially those in the debt-ridden economies where governments are budget-tightening (limited capacity for public investment), as to which practical direction should be focused on so as to attract PI and eventually sustainable growth can take place.

The effects of tobacco taxation and pricing on the prevalence of smoking in Africa

BackgroundTobacco use continues to kill millions of people globally, making it one of the major causes of preventable deaths. Notwithstanding, there has been a very marginal fall in the prevalence of tobacco smoking in Africa. Since taxes (hence prices) are part of the main measures suggested to decrease the demand for tobacco products, this study investigates how tobacco taxation and pricing influence the prevalence of smoking in 24 African countries.MethodsUsing panel data on 24 African countries sourced from the World Health Organization (WHO) and the World Bank databases for the period 2010 to 2016, this study employs the system Generalized Method of Moments (GMM) estimator to investigate the effects of tobacco taxation and pricing on the prevalence of smoking. The system GMM estimator is used due its ability to deal with potential endogeneity of tobacco taxation and pricing: the likelihood that the prevalence of smoking can influence tobacco taxation and pricing which may lead to biased estimates.ResultsTobacco taxation and pricing have negative significant effects on the prevalence of smoking among the selected countries after controlling for growth of Gross Domestic Product (GDP) per capita, urbanization, death rate and net inflows of Foreign Direct Investment (FDI). Specifically, a percentage increase in tobacco price is found to decrease the prevalence of smoking by between 0.11 to 0.14%, while a percentage increase in tobacco tax decreases the prevalence of smoking by between 0.25 to 0.36%, all at 1% level of significance.ConclusionSince tobacco taxation and pricing are found to have negative significant effects on the prevalence of smoking, the implication is that, their use can be intensified by African policy makers towards achieving the WHO Framework Convention on Tobacco Control (FCTC) recommended targets and hence decrease the prevalence of tobacco smoking in Africa. Doing so may therefore help in achieving the Sustainable Development Goal (SDG) 3.5 (prevention and treatment of substance abuse), thereby reducing the colossal number of smoking attributable deaths.

Income diversification and bank risk in Asia Pacific

This paper investigates the effect of income diversification on bank risk for a large sample of commercial banks in 14 Asia Pacific economies over the period 2011–2016. Using a dynamic panel data model with a system generalized methodof moments estimator, we find that banks with a higher level of income diversification are less risky in general. We further consider both developed and emerging economies according to the International Monetary Fund's classification of the level of economic development. Specifically, for emerging economies, the results indicate that banks with a higher level of income diversification face less risk. However, the diversification of commercial bank income has no significant impact on bank risk in developed Asia Pacific economies.

Secondary Education and its Effects on Child Health: Empirical Evidence from Sub-Saharan Africa

Sub-Saharan Africa (SSA) experience higher under-five mortality compared to other regions. This study examines the effect of lagged parent’s secondary education on child health outcome in sub-Saharan Africa countries. It applies the System GMM (Generalized Method of Moments) estimator for 17 years period from 2000 to 2016 using a panel data of 33 selected countries. The findings show strong evidence that lagged parent’s secondary education; income (GDP per capita) and measles immunization have significant effects on improvements of child health in sub-Saharan Africa. Increasing an access to secondary education in the region has achieved better child health status over the period 2000-2016. Lagged parent’s education skills acquired in leaving secondary school are the most important channels that affect child health. The findings suggest expanding and strengthening secondary education in sub-Saharan Africa to meet a Sustainable Development Goal target (SDG) in reducing under-five mortality by the year 2030.

Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

PurposeThe readability of annual reports is an important feature that determines the quality of communication between a firm and its stakeholders. Extant literature has demonstrated that readability characteristics of annual reports are crucial in facilitating the investor's ability to process and analyze information, resulting in higher firm performance and lower agency costs. This study examines the relationship between annual report readability, agency costs and the firm performance of listed financial sector companies in Oman.Design/methodology/approachUsing a sample of 150 firm-year observations of listed financial sector companies on the Muscat Securities Market (MSM) over the period 2014 to 2018, a panel regression analysis is used, along with the system generalized method of moments (GMM) estimation to address endogeneity concerns. The readability of annual reports is proxied by the length of the annual report, the Flesch reading ease and the Flesch–Kincaid index.FindingsThe ordinary least squares (OLS) results suggest that readability proxied by the length of the annual report has no significant relationship with agency cost, return on assets (ROA) or stock returns. The OLS results are confirmed through the system GMM estimation model for agency costs, Tobin's Q and stock returns. Easier-to-read annual reports measured by the Flesch reading ease demonstrate high asset utilization ratio and Tobin's Q. These results emphasize Flesch reading ease measure in explaining the economic significance of agency cost and Tobin's Q. In contrast, difficult-to-read annual reports are observed for firms with high ROA.Research limitations/implicationsThe study is limited to the financial sector. Its generalizability could be extended to a similar sector or countries with features similar to Oman. Future studies on readability could be extended to other sectors of Oman, and financial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures also including cross-country comparisons.Practical implicationsFinancial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures.Originality/valueWhile the study extends prior literature on readability, agency costs and firm performance, it is also one of the first to examine the financial sector of an emerging country, namely, Oman. The study supports the obfuscation hypothesis through the association of readability measure with agency cost. Unlike prior research that has focused on common computational linguistic literature, this study uses three proxies for readability to assess information quality.

Study on the Operation Efficiency of Toll Roads in China from the Perspective of Scale Economy

Although China’s toll highways are world-renowned, they suffer from indisputable operational inefficiencies. Operationally, China’s toll highway sector is characterized by an administrative monopoly. In particular, governmental loan-repayment highways have such characteristics as franchising, monopoly, and “one highway by one company.” Hence, this study concentrates on the relationship between economic performance, administrative monopoly, and scale efficiency with respect to toll highways, and explores how the China-specific administrative monopoly affects the transformation of toll highways from scale to efficiency. Using the globally referenced data envelopment analysis- (DEA-) Malmquist Index, this study first measures the operational efficiency of China’s toll highway sector from 2010 to 2017. Based on provincial panel data, this paper then discusses the relationship between toll highway scale and economic performance through system-generalized method of moments estimation and verifies the status quo of the transformation of toll highways from scale to efficiency. From the provincial and industrial perspectives, this study further verifies how an administrative monopoly restricts the transformation from scale to total factor productivity and scale efficiency through the unique operation pattern in the toll highway sector. Finally, this study conducts an extended analysis of the relationship between operational efficiency and debt in the toll highway sector. The administrative monopoly is found to increase the debt burden of the toll highway sector and to have a negative impact on the long-term sustainability of the sector.

Impact of institutional and cultural distances on ASEAN's trade efficiency

PurposeThis paper aims at assessing the impact of institutional and cultural distances and trade barriers on ASEAN's trade efficiency using a panel data set of 65 countries for the period 2006–2017.Design/methodology/approachFirst, the authors applied an improved version of the stochastic frontier model to estimate the trade efficiency scores. After that, we used the system generalized method of moment (GMM) estimator to investigate the impacts of institutional and cultural distances on ASEAN's trade efficiency.FindingsThe results show that the trade efficiency of ASEAN countries with the rest of the world (ROW) is moderate, ranging from 0.561 to 0.612, but shows a downward trend. This result indicates that considerable trade potential exists between ASEAN countries and ROW. Institutional and cultural distances, as well as the trade barriers, negatively affect ASEAN's trade efficiency. Efforts to reduce differences in institutions and cultures and to promote trade liberalization are vital remedies for ASEAN countries to turn potentials into actual trade performance.Originality/valueThis study contributes to the existing literature in three different ways. First, this is the first study on the impact of the differences between internal and external characteristics on trade efficiency, specifically, the impact of institutional and cultural distances on ASEAN's trade efficiency. Second, to obtain accurate efficiency scores, the authors use an improved version of the stochastic frontier model proposed by Karakaplan (2018), which can control the problem of endogeneity. Third, in quantifying the determinants of trade efficiency, the authors apply a system GMM estimator, which allows us to overcome the problems of endogeneity, measurement errors, and omitted variables.

New Evidence Using a Dynamic Panel Data Approach: Cereal Supply Response in Smallholder Agriculture in Ethiopia

Increasing agricultural production is essential to improving food availability and farm household incomes in developing economies. This study investigated the dynamic supply responses of major cereal crops to price and nonprice factors in Ethiopia using the Ethiopian Rural Household Survey (ERHS) panel dataset from 1994 to 2009. According to the Nerlovian expectation and adjustment approach in conjunction with the system GMM (generalized method of moments) estimator, both the planted areas and produced yields of major crops (teff, wheat, and barley) are influenced by price and nonprice factors in Ethiopia. The supply of major cereal crops is affected positively by their own prices and negatively by the prices of substitute crops. Nonprice factors such as education, farm size, fertilizer, land quality, and precipitation also affect supply of major cereals. Both the short-term and long-term acreage and yield response elasticities of teff and barley are positive. Moreover, the adjustment coefficients are positive for teff, barley, and wheat. The results suggest that Ethiopian farmers are capable of analyzing market signals and responding positively to price increases of staple crops. The findings also imply that the Ethiopian agricultural sector has been responsive to the cereal price increases observed since 2006. The remarkable growth of Ethiopian agriculture over recent decades is partly explained by the increase in agricultural prices. This study recommends that a fine-tuned balance between government interventions and market solutions is important, in addition to improving farmers’ agronomic practices, for increasing agricultural production.