Technical efficiency in traditional agriculture : an econometric analysis of the Rupandehi district of Nepal

Abstract

This study attempts to provide a framework for a better understanding of the technical and allocative efficiencies of individual farms in paddy and wheat farming in the Rupandehi district of Nepal. The input-output data obtained from a Farm Management Survey of the Rupandehi district form the basis of this study. An unrestricted form of the Cobb-Douglas production function is fitted to paddy and wheat data separately. The function is estimated by two different techniques, Ordinary Least Squares and Linear Programming. The function estimated by the first approach is interpreted as the average production function and expresses the output level which an average farm can obtain from a given set of inputs. The function estimated by the second approach is interpreted as the best or frontier production function, which expresses the maximum output level that can be obtained by only the most efficient farm from the combination of factors at the existing state of technical knowledge. The major findings with regard to the production coefficients are as follows: 1) The hypothesis that the sum of production elasticities is not significantly different from unity could not be rejected at conventional levels of significance. This implies that there are constant returns to scale in the production of paddy and wheat in the Rupandehi district. 2) For paddy, the estimated input coeffficients of the frontier production function, with the exception of manure, the coefficient of which is estimated to be insignificant, are almost identical with those of the average function. The frontier function has shifted neutrally outwards from the average function. 3) In the case of wheat, the estimated coefficients of the frontier function are quite different from those of the average function and therefore the frontier function has shifted non-neutrally outwards from the average wheat function. The estimated production functions are used to calculate the technical efficiency of the individual farms. For each crop, two different vectors of technical efficiency are derived from the average and the frontier production functions. The efficiency vectors are calculated as the ratios of observed output to the level of output estimated from the production functions. From this part of the analysis it is found that: 1) There is no significant difference in the efficiency ratings that are derived from the average and the frontier production functions. 2) The efficiency in paddy production is not related to the efficiency in wheat production. This result raises a number of questions as to the meaning of these efficiency indices and suggests lines for further research. An attempt is made to estimate the allocative efficiency of different farm sizes in the use of farm resources at hand. On the basis of the average production function, the marginal returns to factors of production are estimated for both crops separately. The estimated marginal returns are then compared for large and small farm sizes. The major finding is that small farms utilized more labour, seed and manure relative to large farms, and large farms utilized more land relative to other factors than did small farms. The question of whether these differences in utilization rates represent allocative inefficiencies still remains unanswered. To investigate it further would require more adequate data on the relationship between relative factor prices and farm size.