Returns to Scale in Agriculture: A Suggested Theoretical Framework

Standard economic theory suggests that increasing returns come from indivisible f ixed assets. However, many analysts argue that the long run size distribution of machinery, land, structures, irrigation,herds, and flock are continuous. Our objective here is to provide a framework to claim that there are significant returns to scale in agriculture despite the contradictions in past s tudies. We cons ider the impor tance of management ability in production process (Mefford, 1986). The short-run rigidi ties or lumpiness2 of management ability, we believe, would result in scale economies. Therefore, larger farms with higher ability to utilize more will exhibit lower unit costs. We start with behavioral explanation for returns to scale based on the lumpiness of management ability. Next, we develop an econometric model that will allow us to test the behavioral explanation.