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European Review of Agricultural Economics Advance Access originally published online on October 19, 2009
European Review of Agricultural Economics 2009 36(3):343-367; doi:10.1093/erae/jbp031
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2009; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org

Modelling farm production decisions under an expenditure constraint

Subal C. Kumbhakar

State University of New York, Binghamton, USA

Raushan Bokusheva

ETH Zurich (Swiss Federal Institute of Technology), Switzerland

Corresponding author: Subal C. Kumbhakar, Department of Economics, State University of New York in Binghamton, PO Box 6000, Binghamton, NY 13902-6000, USA. Email: kkar{at}binghamton.edu

Received March 2008; final version received May 2009

We use the indirect production function approach in the stochastic frontier framework to estimate separately the output losses due to the presence of a budget constraint and technical inefficiency. We develop a methodology for estimating the severity and testing the significance of the expenditure constraint at individual producer level. Our results, based on the farm data from three Russian regions from 1999 to 2003, show that the majority of the farms studied were expenditure-constrained during the study period. Expenditure constraints caused, on average, a potential output loss of 20 per cent. Output loss due to technical inefficiency, on average, is found to be around 13 per cent.

Keywords: indirect production function, expenditure constraint, stochastic frontier, technical efficiency, Russian agriculture

JEL classification: Q13, D24

* Review coordinated by Thomas Heckelei


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