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Estimation of Profit Functions When Profit Is Not Maximum

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  • Subal C. Kumbhakar

Abstract

This paper deals with derivation and implications of profit functions when profit is not maximum due to the presence of either technical inefficiency or allocative inefficiency, or both. We show that input demand and output supply, elasticities, and returns to scale are, in general, affected by these inefficiencies. We also show that the overall profit efficiency is not necessarily the product of technical and allocative efficiencies, meaning that technical and allocative inefficiencies are not necessarily independent. Estimation techniques are developed for both cross-sectional and panel data models. Working of the model is illustrated using a panel of 60 salmon farms. Copyright 2001, Oxford University Press.

Suggested Citation

  • Subal C. Kumbhakar, 2001. "Estimation of Profit Functions When Profit Is Not Maximum," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 1-19.
  • Handle: RePEc:oup:ajagec:v:83:y:2001:i:1:p:1-19
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    File URL: http://hdl.handle.net/10.1111/0002-9092.00133
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    Cited by:

    1. Rahman, Sanzidur, 2003. "Profit efficiency among Bangladeshi rice farmers," Food Policy, Elsevier, vol. 28(5-6), pages 487-503.
    2. repec:pal:jorsoc:v:58:y:2007:i:4:d:10.1057_palgrave.jors.2602166 is not listed on IDEAS
    3. Chambers, Robert G. & Fare, Rolf, 2004. "Additive decomposition of profit efficiency," Economics Letters, Elsevier, vol. 84(3), pages 329-334, September.
    4. Sheriff, Glenn, 2005. "Measuring profit efficiency with McFadden's gauge function," Economics Letters, Elsevier, vol. 88(2), pages 272-277, August.
    5. Pieralli, Simone & Hüttel, Silke & Odening, Martin, 2013. "A model of firm exit under inefficiency and uncertainty," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 155700, Humboldt University Berlin, Department of Agricultural Economics.
    6. Boris Bravo-Ureta & Daniel Solís & Víctor Moreira López & José Maripani & Abdourahmane Thiam & Teodoro Rivas, 2007. "Technical efficiency in farming: a meta-regression analysis," Journal of Productivity Analysis, Springer, vol. 27(1), pages 57-72, February.
    7. Lundgren, Tommy & Marklund, Per-Olov, 2012. "Environmental Performance and Profits," CERE Working Papers 2012:8, CERE - the Center for Environmental and Resource Economics.
    8. Cherchye, Laurens & Van Puyenbroeck, Tom, 2007. "Profit efficiency analysis under limited information with an application to German farm types," Omega, Elsevier, vol. 35(3), pages 335-349, June.
    9. Subal Kumbhakar & Frank Asche & Ragnar Tveteras, 2013. "Estimation and decomposition of inefficiency when producers maximize return to the outlay: an application to Norwegian fishing trawlers," Journal of Productivity Analysis, Springer, vol. 40(3), pages 307-321, December.
    10. Shanxia Sun & Juan P. Sesmero & Karina Schoengold, 2016. "The role of common pool problems in irrigation inefficiency: a case study in groundwater pumping in Mexico," Agricultural Economics, International Association of Agricultural Economists, vol. 47(1), pages 117-127, January.
    11. Arnade, Carlos Anthony & Trueblood, Michael A., 2002. "Estimating A Profit Function In The Presence Of Inefficiency: An Application To Russian Agriculture," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), July.
    12. Diagne, Youssoupha S & Sène, Serigne Moustapha, 2009. "La profitabilité des secteurs de l’économie sénégalaise
      [Profitability of economic sectors in Senegal]
      ," MPRA Paper 54921, University Library of Munich, Germany.
    13. Sean Pascoe & Parastoo Hassaszahed & Jesper Anderson & Knud Korsbrekke, 2003. "Economic versus physical input measures in the analysis of technical efficiency in fisheries," Applied Economics, Taylor & Francis Journals, vol. 35(15), pages 1699-1710.
    14. Tronstad, Russell & Silvertooth, Jeffrey C. & Husman, Steve, 2001. "Optimal Production Inputs With Varying Quality And Yield Components: Irrigation Termination Of Upland," 2001 Annual Meeting, July 8-11, 2001, Logan, Utah 36088, Western Agricultural Economics Association.
    15. Wossink, Ada & Denaux, Zulal Sogutlu, 2002. "Environmental Efficiency, Separability And Abatement Costs Of Non-Point Source Pollution," 2002 Annual meeting, July 28-31, Long Beach, CA 19884, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. Pieralli, Simone & Hüttel, Silke & Odening, Martin, 2014. "Abandonment of milk production under uncertainty and inefficiency: The case of West German farms," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170236, Agricultural and Applied Economics Association.
    17. Bravo-Ureta, Boris E. & Rivas, Teodoro E. & Thiam, Abdourahmane, 2002. "A Meta-Analysis of Technical Efficiency in Farming: A Multi-Country Perspective," 13th Congress, Wageningen, The Netherlands, July 7-12, 2002 7018, International Farm Management Association.
    18. Tommy Lundgren & Per-Olov Marklund, 2015. "Climate policy, environmental performance, and profits," Journal of Productivity Analysis, Springer, vol. 44(3), pages 225-235, December.
    19. repec:kap:hcarem:v:21:y:2018:i:1:d:10.1007_s10729-016-9378-y is not listed on IDEAS
    20. McArthur, Travis, 2016. "Direct Measurement of Efficiency Gains from Land Titling: PROCEDE's Effect upon the Productivity of Mexican Agriculture," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236133, Agricultural and Applied Economics Association.
    21. Kumbhakar, Subal C., 2011. "Estimation of production technology when the objective is to maximize return to the outlay," European Journal of Operational Research, Elsevier, vol. 208(2), pages 170-176, January.
    22. Baardsen, Sjur, 8. "Profit Efficiency in Norwegian Timber Supply: A Stochastic Frontier Function for Active NIPFs," Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Scandinavian Society of Forest Economics, issue 41, May.
    23. Lowry, Mark Newton & Getachew, Lullit, 2009. "Statistical benchmarking in utility regulation: Role, standards and methods," Energy Policy, Elsevier, vol. 37(4), pages 1323-1330, April.

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