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Modelling Farms' Production Decisions Under Expenditure Constraints

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  • Bokusheva, Raushan
  • Kumbhakar, Subal C.

Abstract

Limited budget for the purchase of variable inputs might adversely affect producer's input use decisions and might result in a non-optimal input usage. If expenditure constrains are present and binding, unconstrained profit-maximization is not valid for modelling producers' input use decisions. In this paper we apply the indirect production function approach which describes output maximization subject to a given technology, a set of quasi-fixed inputs and a given budget for the purchase of variable inputs. By employing the indirect production function in the stochastic frontier framework we can estimate producer's output loss due to both expenditure constraints and technical inefficiency. Our estimation results show that most of the study farms were expenditure constrained during the considered period. Expenditure constraints have caused on average a potential output loss of 11 percent. Output loss due to technical inefficiency is quite moderate and averages 18 percent.

Suggested Citation

  • Bokusheva, Raushan & Kumbhakar, Subal C., 2008. "Modelling Farms' Production Decisions Under Expenditure Constraints," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6641, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eaa107:6641
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    File URL: http://purl.umn.edu/6641
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    References listed on IDEAS

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    1. Raushan Bokusheva & Heinrich Hockmann, 2006. "Production risk and technical inefficiency in Russian agriculture," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 33(1), pages 93-118, March.
    2. Anjana Bhattacharyya & Subal C. Kumbhakar, 1997. "Market Imperfections and Output Loss in the Presence of Expenditure Constraint: A Generalized Shadow Price Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 860-871.
    3. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
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    Cited by:

    1. Obeng, K. & Sakano, R. & Naanwaab, C., 2016. "Understanding overall output efficiency in public transit systems: The roles of input regulations, perceived budget and input subsidies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 89(C), pages 133-150.
    2. K. Obeng, 2011. "Indirect production function and the output effect of public transit subsidies," Transportation, Springer, vol. 38(2), pages 191-214, March.
    3. Helen Pushkarskaya & Maria Marshall, 2010. "Family Structure, Policy Shocks, and Family Business Adjustment Choices," Journal of Family and Economic Issues, Springer, vol. 31(4), pages 414-426, December.

    More about this item

    Keywords

    Indirect production function; SFA; expenditure constraints; technical efficiency; Russian agriculture; Farm Management; Research Methods/ Statistical Methods;

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