Estimating Relative Technical Efficiency in Barani Agriculture: Some Further Results

The concept of technical efficiency of farms has sufficiently been detailed in the literature on agricultural economic development since Farrell (1957) and has now widely been studied by, among others, Bardhan (1973); Kalirajan and Flinn (1983); Fare, Grosskopf and Lovell (1985); Battese, Coelli and Colbi (1989); Kalirajan (1990); Battese and Coelli (1992); Himayatullah, et al. (1994); and Bashir and Himayatullah (1994). The interest in relative economic efficiency emerged from the observation that labour intensity and yield are inversely related to farm size. Economists interpreted this result as an indication that either small and large farms faced different configurations of input and output prices, or small and large farms differed with respect to economic efficiency. Economic efficiency of a group of farms can be conceptualised as comprising two main components; technical efficiency and allocative efficiency. A group of farms may be considered technically more efficient than another group of farms if it can produce a given output with less of some or all inputs, and a group of farms may be considered allocatively more efficient than another group of farms if it is more successful in equating marginal revenue product with the marginal cost of inputs. More simply, technical efficiency involves the farm’s ability to obtain the maximum possible output from a given set of resources, and allocative efficiency concerns its ability to maximise profits by equating the marginal revenue product with the marginal cost of inputs. Specifically, a group of farms that uses the best combination of inputs achieves the maximum possible output and is superior to another group of farms which does not do the same, given a similar bundle of inputs.