Agro-clusters, market imperfections, and technology adoption in Ethiopia: exploring impacts and pathways

Governments and development agencies in many developing countries have been promoting agro-cluster initiatives as a common avenue for promoting the adoption and diffusion of productivity-enhancing agricultural technologies. However, little is known about whether and under which conditions these agro-cluster schemes effectively promote the adoption of these inputs. Using a unique panel farm-household survey of about 5,000 smallholder farmers, we examine the impact of the agro-clusters on extensive and intensive adoption of agricultural technologies in Ethiopia. We employ a two-stage propensity score matching estimator using two broadly used matching algorithms, namely kernel and five-nearest neighbors matching methods. Our results suggest that the agro-cluster fosters both extensive and intensive adoption of modern agricultural inputs. We further undertake heterogeneity analysis to highlight the mechanism that enables agro-clusters to effectively promote the adoption of these inputs. The result shows that relaxing information and credit constraints may be the possible channels through which agro-clusters foster the adoption process. The findings also lend support to the widely held notion in development economics that households who are exposed to imperfect markets are unresponsive to government incentive schemes and opportunities to adopt new technologies. The findings provide strong evidence that the agro-cluster scheme may be a crucial policy instrument to promote the adoption of agricultural technologies with ensuing impacts on rural livelihoods and welfare.