With the rapidly changing economic environments and numerous challenges hindering smallholders’ adoption of externally developed technologies, it is often argued that farmers’ innovations may be essential in the livelihoods of rural farm households and need to be promoted. Yet a rigorous assessment of the impacts of farmer innovation is lacking. Consequently, we analyse the effect of farmer innovation on household welfare, measured by farm and household income, consumption expenditure and food security. Using data from a recent field survey of rural farm households in northern Ghana and endogenous switching regression which controls for non-random selection bias, we estimate the welfare gains for innovators from innovating, and non-innovators had they innovated. We find that farmer innovation significantly improves both household income and consumption expenditure for innovators. It also contributes significantly to the reduction of food insecurity among innovative households by increasing household food consumption expenditure, reducing the length of food shortages, and decreasing the severity of hunger. However, we find that the positive productivity and income effects of farmer innovation do not significantly translate into nutritious diet, measured by household dietary diversity. The results also indicate that farmer innovation would have heterogeneous welfare effects for non-innovators, had they decided to innovate. Overall, our results show positive and significant welfare effects of farmer innovation, hence, support increasing arguments on the need to promote farmer innovation as a complement to externally promoted technologies in food security and poverty reduction efforts.