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Farm-level nonparametric analysis of cost-minimization and profit-maximization behavior

  • Featherstone, Allen M.
  • Moghnieh, Ghassan A.
  • Goodwin, Barry K.

This study investigates non-parametrically the optimizing behavior of a sample of 289 Kansas farms under profit-maximization and cost-minimization hypotheses. The study uses both deterministic and stochastic non-parametric tests. The deterministic results do not support strict adherence to either optimization hypothesis. The stochastic tests suggest that all 289 farms fail the profit-maximization hypothesis, whereas 171 farms failed the cost-minimization hypothesis. Allowing for non-regressive technical change does not alter the basic results; 276 farms violate the profit-maximization hypothesis and 138 violate the cost-minimization hypothesis. The evidence against cost-minimization behavior seems to be far less substantial than that against profit-maximization behavior.

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Article provided by Blackwell in its journal Agricultural Economics.

Volume (Year): 13 (1995)
Issue (Month): 2 (November)
Pages: 109-117

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Handle: RePEc:eee:agecon:v:13:y:1995:i:2:p:109-117
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  1. Langemeier, Larry N., 1990. "Farm Management Data Bank·Documentation," Staff Papers 133757, Kansas State University, Department of Agricultural Economics.
  2. Hongil Lim & C. Richard Shumway, 1992. "Separability in State-Level Agricultural Technology," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(1), pages 120-131.
  3. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
  4. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-97, May.
  5. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  6. Lim, Hongil & Shumway, C Richard, 1992. "Profit Maximization, Returns to Scale, and Measurement Error," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 430-38, August.
  7. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  8. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
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