PARAMETRIC DECOMPOSITION OF OUTPUT GROWTH

Abstract

This paper proposes a tractable approach for analyzing the sources of TFP changes (i.e., technical change, changes in technical and allocative inefficiency, and the scale effect) in a multi-output setting, while retaining the single-equation nature of the econometric procedure used to estimate the parameters of the underlying technology. The proposed approach relies on Bauer’s cost function based decomposition of TFP changes and the duality between input distance and cost functions. The empirical results are based on a sample of 121 UK livestock farms observed over the period 1983-92 and a translog input distance function. It is found that improvements in technical efficiency appear to provide greater potential for enhancing farm returns than that which may be obtained from shifting the production frontier itself. In addition, scale economies and allocative inefficiency are also important sources for TFP changes on UK livestock farms.Cost function based decomposition of TFP, input distance function; UK livestock farms