Analysis of economic efficiency in northern Pakistan: Estimation, causes and policy implications

Abstract

The study estimates technical and allocative efficiency using the stochastic translog frontier production function and then relates them to management qualities (experience, education, extension and knowledge) of wheat farmers in northern Pakistan. The study provides guidance for policy makers, agronomists and extension agents to improve wheat productivity in the area.The average technical efficiency is 76 percent which is consistent with the previous studies in LDCs. To relate technical inefficiency to the farmer's management qualities a two-stage approach is developed which assumes that technical inefficiency depends upon management practices and each management practice in turn is affected by management qualities. To increase technical efficiency farmers need to use improved varieties, good wheat stand and control broadleaf weed. Farmer's knowledge about wheat technology plays a major role in the adoption of the above management practices. To test the robustness of the frontier approach, an alternative approach which involved putting management quality variables directly into the production function (the direct approach) was developed. The only major difference was that in the direct approach, extension contacts are important in increasing productivity, whereas they had no effect in the frontier approach.The average cost-constrained output-maximizing allocative efficiency is 43 percent which is substantially lower than the previous studies in LDCs. Farmers are also scale inefficient--the marginal cost of an input at the constrained output-maximizing input levels was far below the price of wheat. To increase allocative and scale efficiency, farmers need to change the input mix and to increase the scale of operation. None of the management qualities were found to affect allocative efficiency. However, interaction of farmers with the marketing agents play an important role in achieving higher allocative efficiency.The theoretical argument that aggregation of inputs overestimates technical inefficiency is not supported by the results but mis-specification of functional form (use of Cobb-Douglas as opposed to the translog production frontier) produces overestimates of technical inefficiency.U of I OnlyETDs are only available to UIUC Users without author permissio