A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms

Abstract

This article investigates farm-level efficiency of U.S. dairy farmers by estimating their technical and allocative efficiency. Technical inefficiency is assumed to be composed of a deterministic component that is a function of some farm-specific characteristics and a random component. By doing this we extend the stochastic frontier methodology in which determinants of technicial inefficiency are explicitly introduced in the model. Given the inputs, variations in efficiency of farms are then explained by both deterministic and random components of technical inefficiency. The empirical results indicate that (a) levels of education of the farmer are important factors determining technical inefficiency and (b) large farms are more efficient (technically) than small and medium-sized farms. Both technical and allocative inefficiency are found to decrease with increase in the level of education of the farmer.