Estimation of Input Distance Functions: A System Approach

American Journal of Agricultural Economics, Forthcoming

20 Pages Posted: 23 Feb 2015

See all articles by Efthymios G. Tsionas

Efthymios G. Tsionas

Athens University of Economics and Business - Department of Economics

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics

Emir Malikov

University of Nevada, Las Vegas

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Date Written: February 17, 2015

Abstract

This article offers a methodology to address the endogeneity of inputs in the input distance function (IDF) formulation of the production processes. We propose to tackle endogenous input ratios appearing in the normalized IDF by considering a flexible (simultaneous) system of the IDF and the first-order conditions from the firm's cost minimization problem. Our model can accommodate both technical and (input) allocative inefficiencies amongst firms. We also present the algorithm for quantifying the cost of allocative inefficiency. We showcase our cost-system-based model by applying it to study the production of Norwegian dairy farms during the 1991-2008 period. Among other things, we find both an economically and statistically significant improvement in the levels of technical efficiency among dairy farms associated with the 1997 quota scheme change, which a more conventional single-equation stochastic frontier model appears to be unable to detect.

Keywords: Cost Minimization, Dairy Production, Dairy Quota, Endogeneity, Input Distance Function, Stochastic Frontier

JEL Classification: C33, D24, Q12

Suggested Citation

Tsionas, Efthymios (Efthymios) G. and Kumbhakar, Subal C. and Malikov, Emir, Estimation of Input Distance Functions: A System Approach (February 17, 2015). American Journal of Agricultural Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2568431

Efthymios (Efthymios) G. Tsionas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 8203 (Phone)
+301 8203 301 (Fax)

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

Emir Malikov (Contact Author)

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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