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Estimating Supply Response in the Presence of Technical Inefficiency Using the Profit Function: An Application to Ethiopian Agriculture


  • Suleiman Abrar



Studies of supply response using the profit function have typically maintained the neo- classical assumption of efficiency. Using farm-level data from Northern Ethiopia, this study examines the impact of technical inefficiency on the response of small holder farmers. Two systems of output supply and input demand functions are estimated and compared: one the standard model in which technical efficiency is assumed and another in which technical inefficiency is explicitly incorporated into the profit function. While the results from non-nested hypotheses tests are inconclusive, the model with technical inefficiency is preferred to the other model for theoretical consistency. Incorporation of inefficiency has generally increased the magnitudes and the statistical significance of own price elasticities, substantially so in the case of teff and fertilizer. The results indicate that farmers in Ethiopia do respond positively and significantly to price incentives. The results also underscore the need to improve farmer’s access to better quality land, farm inputs and credit, and public investment in roads and irrigation.

Suggested Citation

  • Suleiman Abrar, 2003. "Estimating Supply Response in the Presence of Technical Inefficiency Using the Profit Function: An Application to Ethiopian Agriculture," Discussion Papers in Economics 03/4, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:03/4

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    Cited by:

    1. Schmidt, Emily & Chinowsky, Paul & Robinson, Sherman & Strzepek, Kenneth M., 2014. "Determinants and impact of sustainable land and watershed management investments: A systems evaluation in the Blue Nile Basin, Ethiopia:," ESSP working papers 62, International Food Policy Research Institute (IFPRI).
    2. Kelly, Valerie A., 2005. "Farmers' Demand for Fertilizer in Sub-Saharan Africa," Staff Papers 11612, Michigan State University, Department of Agricultural, Food, and Resource Economics.

    More about this item


    Supply Response; Technical Inefficiency; Elasticities; Profit functions;

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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