Cost Functions From Cross-Section Data—Fact or Fantasy?

Production and cost functions have long been recognized as vital components of economic analyses relating to the individual firm. The U.S. Department of Agriculture, beginning with the pioneering work of T V. J. Spillman, has been a continuing participant in their empiric and theoretical development. Whereas early work emphasized farm production and cost functions, much attention has centered lately on the marketing firm. This attention has brought into sharper focus certain organizational and operating characteristics of plants. With growing interest in the marketing area, the work in the Department expanded to include cooperative research with several State experiment stations. A major such effort has involved the Marketing Economics Division, Economic Research Service, and the California Agricultural Experiment Station. This is the first of three papers prepared for publication in Agricultural Economics Research to reflect some aspects of theoretical and methodological developments in these studies. The following paper comments on, and extends the results of, a statistical analysis of costs in the operation of feed mills developed in a cooperative study with the Iowa Agricultural Experiment Station, and reported in this journal by Richard Phillips in 1956. In a second paper the authors will deal with the possibilities of developing production and cost functions from more detailed analysis of accounting records of individual firms. A third paper will discuss the technique of plant cost synthesis. This report grew out of research in plant cost and efficiency carried on cooperatively by the Marketing Economics Division, Economic Research Service, and the Giannini Foundation of Agricultural E conomics,University of California at Berkeley. The authors are indebted to L. L. Sammet, B. C. French, and D. B. DeLoach of the University of California, and W. F. Finner and V. J. Brensike of the Economic Research Service, U.S. Department of Agriculture, for their helpful suggestions during the preparation of this paper.