fertilizer use.<sup>25</sup> In the case of household size, this suggests that the channel through which household size affects adoption has more to do with food demand that weak labor markets. From a technical perspective, excluding these variable from the model does not materially affect the parameters of the remaining determinants.<sup>26</sup> In contrast, literacy does have a positive impact on fertilizer use.

As discussed, wealth can mitigate weaknesses in credit and insurance markets. Separate from the capacity to take-on risk, wealth may also be associated with a greater preference for risk. Consistent with these arguments, the parameter on wealth in the demand equation is positive and statistically significant, as it was in the adoption equation. In general, fertilizer applications are made before weather outcomes are known; although farmers can make some adjustments when fertilizer is applied in a series of doses. As discussed, this latter practice is not common in Ethiopia and the results suggest that, although climate is an important determinant of whether fertilizer-using practices are adopted, contemporaneous weather outcomes do not affect fertilizer demand in a statistically measureable way. And finally, the time effect estimates suggests that fertilizer demand increased between the first and second waves, even after adjusting for changes in other determinants. This provides indirect evidence of a positive trend in the adoption of fertilizer-using technologies that is consistent with government efforts to promote more productive technologies.

# **Conclusion**

Cereal yields and fertilizer use are low in Ethiopia relative to other regions and there is a widely expressed view that a significant change in Ethiopian agriculture is impossible without a significant increase in the use of fertilizers. Moreover, because supplies of organic fertilizer and the scope for increased fallowing are limited in Ethiopia, any significant growth in fertilizer use will depend on an increase in the application of chemical fertilizers. Even though research from field studies and pilot programs in Ethiopia shows that the economic returns to chemical fertilizer are sometimes large relative to its cost; the application rates are nonetheless low. Based on a panel household data from 2004 and 2006, this paper examines the role of missing and imperfect markets that affects farmer choices about chemical fertilizer applications in Ethiopia.

Taken together, the results suggest that fertilizer markets are not altogether absent in rural Ethiopia and, for some farmers, work as expected. At the same time, the modeling results provide evidence that high transport costs, limitations in complementary markets for credit and insurance, adverse climate and illiteracy all conspire to limit the adoption of chemical fertilizers in Ethiopia. Moreover, the combination of factors that promote or impede effective fertilizer markets differs among locations, making it difficult to find a single production technology that is uniformly profitable. One implication is that inconsistencies can be expected between field studies and pilots finding large returns to the use of fertilizers in Ethiopia and studies finding

> 25 Nkonya et al (1997) report a similar finding.

> 26 See table 1 of the supplemental annex.

13