Production under input endogeneity and farm-specific risk aversion: evidence from contract farming and Bayesian method

Contract farming (CF) has been offered as a solution to missing markets in developing economies. However, little is known as to how the presence of CF affects production risk, technical efficiency and risk attitudes of the smallholder. This study investigates production risk, technical efficiency, output price uncertainty and risk attitudes of contract and independent farmers. Using a Bayesian estimation method and farm-level data from Nepal, we find that contract farmers are more risk-averse than the independent farmers. Contract farmers can increase output by reducing the scale more than independent farmers. We find that labour and capital are risk-reducing, while land and other inputs are risk increasing for both contract and independent farmers. Finally, independent growers consistently over-predict output prices.