Abstract
This paper proposes an econometric framework for joint estimation of technology and technology choice/adoption decision. The procedure takes into account the endogeneity of technology choice, which is likely to depend on inefficiency. Similarly, output from each technology depends on inefficiency. The effect of the dual role of inefficiency is estimated using a single-step maximum likelihood method. The proposed model is applied to a sample of conventional and organic dairy farms in Finland. The main findings are: the conventional technology is more productive, ceteris paribus; organic farms are, on average, less efficient technically than conventional farms; both efficiency and subsidy are found to be driving forces behind adoption of organic technology.
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Notes
It is worth noting that organic farming might have other effects (positive or negative) for example, on the environment, which are not taken into account due to lack of reliable farm level data. Nielsen and Kristensen (2005) conclude that N and P surpluses are larger on conventional dairy farms in Denmark. Grönroos et al. (2006) have suggested that the use of non-renewable energy is higher per unit produced on conventional farms. Hole et al. (2005) also suggest that biodiversity is larger in organic farming systems than in conventional ones. Thus, we are able to clarify the question only with respect to traditional inputs and outputs.
To capture differences in input and output prices the comparison should be based on profitability.
Most of the technical efficiency comparisons between organic and conventional farms are based on traditional inputs (labor, land, materials) and outputs (milk, grain etc.) in which the technology is assumed to be the same (e.g., Tzouvelekas et al. 2001). Although most of the machinery can be used in both technologies the ban of applying synthetic fertilizers and plant protection in organic farming suggest that the organic farmer has to learn new production practices and has to take a somewhat long-term perspective. In addition, changes are required when it comes to animal production, animal welfare, feeding and treatment of sick animals. Organic farmers are required to have larger space per animal in the cowshed, restrictions in the percentage of purchased (especially conventional) feeding stuffs and the use of medicines. In view of these, we assume that organic and conventional production technologies are different.
It is worth noting here that the model developed in this section works with cross-sectional data as well. Since panel data is used in the application, we decided to write down the model in terms of panel data.
The normality assumption on e it can be easily relaxed if we specify that \(P(I_{it} =1|u_{it})=F(z^{\prime}_{it} \gamma +\delta u_{it})\) where F is any cdf. We used two other distributions in the empirical application.
See Tsionas and Papadogonas (2006) for a model where technical inefficiency is a determinant of exit.
See Greene (2003) for details on the use of simulated maximum likelihood procedure in estimating inefficiency using the stochastic frontier approach.
The coefficients on the regional dummies are not reported here to conserve space.
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Kumbhakar, S.C., Tsionas, E.G. & Sipiläinen, T. Joint estimation of technology choice and technical efficiency: an application to organic and conventional dairy farming. J Prod Anal 31, 151–161 (2009). https://doi.org/10.1007/s11123-008-0081-y
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DOI: https://doi.org/10.1007/s11123-008-0081-y