Determinants of Persistent and Transient Technical Efficiency of Austrian Crop Farms

In the last two decades, the Common Agricultural Policy (CAP) of the European Union (EU) has experienced significant changes which has created a highly competitive market in which farmers operate. This is particularly challenging for countries with small-scaled agriculture like Austria, requiring farms to significantly improve technical efficiency in order to be competitive. In this paper, we apply a four-error component model to decompose technical efficiency into persistent inefficiency, which captures long run effects of farm management, and transient inefficiency, which accounts for how farms adjust to short run production shocks, while controlling for farm heterogeneity and a random error. We extend this model to include exogenous determinants for both types technical inefficiency. To do so, we estimate a translog stochastic production function for a panel of 231 Austrian crop farms for the period 2003-2016. We observe that though transient and persistent efficiency are similar on average, persistent efficiency is much more dispersed suggesting that persistent technical inefficiency poses a greater problem for Austrian crop farms than the transient component. Overall technical efficiency is estimated at 89%. Regarding persistent technical efficiency, we find that full time farms and medium to large scale farms are more efficient. However, we observe that older farmers and farms that employ a high proportion of family labour are less persistently efficient. With regards to transient technical efficiency, we find that farms that cultivate more on their own land are less transiently efficient compared to farms on rented land. Lastly, we observe that farm subsidies in general negatively affects both types of efficiency.