Abstract: Contract farming is becoming popular in most developing countries. Most African farmers operate relatively smaller farm sizes and are resource-poor, characterized by poor access to farm and financial inputs and operate in unreliable inputs and output markets. Extant literature shows that contract farming offers solutions to most of these constraints. However, not all smallholder farmers participate in contracts and those who do, often violate the contracts. Empirical research on effect of contract farming on smallholder livelihoods show inconclusive results. This study analyzed participation in contract farming and its effects on technical efficiency (TE) and smallholder farmers’ income in Bungoma and Busia counties in Western Kenya. The present study focused on chili and spider plants as the targeted vegetables due to their richness in vitamins and phytochemicals. Primary data was collected from 300 smallholder vegetable farmers in Bungoma and Busia counties. A Probit model was used to analyze the determinants of participation in contract farming while stochastic production frontier and metafrontier models were applied in analyzing TE and technology gaps. Endogenous treatment regression model was used to analyze the effect of participating in contract farming on farm income. Results revealed that contract farming had a positive effect on TE, technology gap ratios (TGRs) and income. The incentives and disincentives of contracting firms should be put into account when designing programmes and policies for promoting contract farming to ensure that there is a balance in benefits between the contracting and contracted parties.