Modelling Investment Optimization on Smallholder Farms through Multi-criteria Decision Approaches: An Example from Ethiopia

William Seitz and Davide La Torre

No 2014-06, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: We use data from the Ethiopia Rural Household Survey and the Ethiopian Central Statistics Agency to demonstrate a set of techniques for estimating optimal investment allocation in smallholder farming. The approaches treat farming tasks, constraints, and investments as a portfolio problem, characterized by multiple competing objectives. We formulate several versions of the multi-objective problem and solve them in three alternative ways; 1) using standard Markowitz portfolio optimization, 2) using a weighted goal programming model, and 3) a multi-horizon mean variance goal programming model, estimating all model parameters using real data. The main benefit of the goal programming formulation is the possibility to simplify in a single criterion problem complex situations in which the Decision Maker (DM) faces a trade-off between two or more objectives. We discuss the importance of portfolio allocations for smallholder farmers in minimizing risk and increasing return, and discuss how these approaches provide a framework that can be extended to practical applications in smallholder farming.

Date: 2014
New Economics Papers: this item is included in nep-agr, nep-cmp and nep-sog
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