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Modelling Farms' Production Decisions Under Expenditure Constraints

  • Bokusheva, Raushan
  • Kumbhakar, Subal C.

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.

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File URL: http://purl.umn.edu/6641
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Paper provided by European Association of Agricultural Economists in its series 107th Seminar, January 30-February 1, 2008, Sevilla, Spain with number 6641.

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Date of creation: 2008
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Handle: RePEc:ags:eaa107:6641
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  1. 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 325-32.
  2. 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.
  3. 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.
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