Do Governance Practices in Cluster Farming Improve Wheat Farmers' Profitability? Evidence From Ethiopia

Abstract

ABSTRACT Cluster farming has been promoted as an institutional strategy to improve smallholder productivity, market access and profitability in developing countries. However, empirical evidence on the association between governance practices and wheat profitability within cluster systems remains limited. This study examines the role of governance practices on the profitability of wheat farmers in Ethiopia, placing particular emphasis on the mediating role of farm‐gate selling prices. Using cross‐sectional data from 759 farmers across 11 clusters, governance dimension indices were constructed using principal component analysis, and effects were estimated using two‐stage least squares, three‐stage least squares and quantile regression. Results show that accountability, participation and conflict resolution have positive and significant effects on wheat profitability, while transparency has a negative association, likely reflecting coordination and compliance costs. Mediation analysis reveals that farm‐gate price explains about 89.5% of governance's total effect on profitability. Governance effects also vary by cluster group, landholding size, input use and profitability levels. Strong governance improves bargaining power, price realisation and economic returns. The findings highlight the importance of institutional quality in cluster farming. Strengthening accountability, participation and conflict resolution can significantly improve profitability and support smallholder livelihoods, offering key policy insights for cluster‐based agricultural development in Ethiopia and similar contexts.