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Abstract Recently, due attention was given to the commercialization of smallholder agriculture through contact farming, hoping that it would bring the positive impact on the income of smallholder producer in Ethiopia. This article presents the results of data analysis conducted to generate empirical data required to inform the smallholder agricultural commercialization policy using data collected from 424 (194 participants and 230 non-participants) randomly selected vegetables producer farmers from the 2 districts of the East shewa zone of the Oromia Regional State, Ethiopia. The propensity score matching was used to assess the impact of contract farming (CF) on smallholder farmers’ income in the study area. The probit model result shows that, the proportion of total crop area allocated to vegetables, access to credit, frequency of extension contacts, market information, and distance of the market center havepositive and significance effects on decision of vegetable producers to participate on the CF. The impact assessment result using PSM reveals that, gross annual income of the contract participants were lower by the 3.8% (Birr 2942) as compared to the non- participants. This implies that, local context matters for the success of CF and improves their livelihood. However, some of the CF participants would like to continue for access of production inputs, access to credit, technical advice and to reduce marketing risks and uncertainty. In conclusion, CF is a useful institutional arrangement which increases smallholders’ income and benefit from remunerative value chains agriculture, but it is not a panacea that works in different contexts. Hence, policy makers should base their choices on empirical evidence and local context to consider alternative and complementary intervention options to enhance smallholder commercialization and ensure sustainable livelihood in the research area.