Resource Allocation and Risk: A Case Study of Smallholder Agriculture in Kenya

A model of economic behavior under conditions of uncertainty demonstrates that the traditional tests of economic efficiency in agriculture are generally misspecified. A data set from Kenya is used in testing a risk‐aversion model; the results permit the following conclusions. Risk plays an important role in farmer decision making; farmers are efficient in their allocation of resources; and lack of credit availability is a major bottleneck in obtaining increased agricultural productivity for the regions studied in Kenya.