Supply response in Ethiopia: accounting for technical inefficiency

Few empirical studies of supply response using the profit function have accounted for technical inefficiency. Using farm-level panel data from Ethiopia, this study examines the effect of incorporating technical inefficiency in estimating the supply response of peasant farmers. Two systems of output supply and input demand equations are estimated and compared: the conventional model in which technical efficiency is assumed and another in which technical inefficiency is explicitly incorporated. The model with technical inefficiency is preferred on grounds of theoretical consistency and improved estimates, although model comparison tests are not conclusive. Incorporation of inefficiency generally increases the magnitudes and the statistical significance of own price elasticities, substantially so in the case of fertilizer and fertilizer-intensive crops, and alters the priority attached to nonprice factors. An important result is that only the specification with inefficiency reveals a significant effect of access to extension services on output. Only this specification finds that output increases with household size, which one expects as the farms in the sample are largely subsistence and producing for own consumption. Furthermore, the results demonstrate that farmers' response to incentives is considerably restricted by inefficiency, suggesting that the traditional model would overstate response by excluding the efficiency variable. Copyright 2006 International Association of Agricultural Economists.

Effects of subsidies in Russian dairy farming

This study develops a microeconometric model of specialized dairy farms in the Moscow region using panel data over the period 1995-2001. The model is used to analyze the role of subsidies on profit as well as input and output allocation. Theoretical conditions for short-term profit maximization are not rejected by the data. Differences between farms allow for a fixed-effect specification. The dairy producers in the region demonstrate a low responsiveness to market signals, but technology change becomes important. Labor, land, and livestock had low shadow prices. Although subsidies have a distorting effect on the input-output mix, this study shows they relieve the credit constraints on dairy farms and have an important positive influence on farm profit. Copyright 2005 International Association of Agricultural Economics.