Input Substitution, Productivity Performance and Farm Size

21 Pages Posted: 6 Jul 2016

See all articles by Yu Sheng

Yu Sheng

Government of the Commonwealth of Australia - Australian Bureau of Agricultural and Resource Economics (ABARE)

Alistair Davidson

Government of the Commonwealth of Australia - Australian Bureau of Agricultural and Resource Economics (ABARE)

Keith Fuglie

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Dandan Zhang

National School of Development, Peking University

Date Written: July 2016

Abstract

This paper develops a theoretical model to examine the relationship between the input elasticity of (technical) substitution and both farm total factor productivity and size. In the presence of ongoing technical change and its factor bias, the ‘income effect’ arising from farms' cost minimising behaviour enables them to increase productivity by saving inputs or, through the dual equivalent, enlarging farm size. As such, farms with higher elasticities of substitution tend to grow larger and become more productive, which provides a new mechanism through which farm heterogeneity in productivity growth can be examined. Empirical evidence from Australian broadacre agriculture supports this theory and points to important policy implications.

Keywords: elasticity of technical substitution, income effect, total factor productivity

Suggested Citation

Sheng, Yu and Davidson, Alistair and Fuglie, Keith and Zhang, Dandan, Input Substitution, Productivity Performance and Farm Size (July 2016). Australian Journal of Agricultural and Resource Economics, Vol. 60, Issue 3, pp. 327-347, 2016. Available at SSRN: https://ssrn.com/abstract=2804805 or http://dx.doi.org/10.1111/1467-8489.12136

Yu Sheng (Contact Author)

Government of the Commonwealth of Australia - Australian Bureau of Agricultural and Resource Economics (ABARE) ( email )

Canberra
Australia

Alistair Davidson

Government of the Commonwealth of Australia - Australian Bureau of Agricultural and Resource Economics (ABARE) ( email )

Canberra
Australia

Keith Fuglie

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5588 (Phone)

Dandan Zhang

National School of Development, Peking University ( email )

Beijing, 100871
China

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