Efficiency estimation in a profit maximising model using flexible production function

Abstract

This paper uses a flexible (translog) production function to estimate efficiency of 227 farms from West Bengal, India. We consider estimation of technical and allocative inefficiencies using a profit maximising framework which accommodates both endogenous and exogenous inputs. The maximum likelihood method of estimation developed in this paper is based on the production function and the first-order conditions of profit maximisation. Farm-specific technical and allocative inefficiencies are also estimated. Empirical results show that the mean level of technical efficiency is 75.46% while the best farm is 85.87% efficient (technically). So far as allocative efficiency is concerned the majority of the farms are found to be under-users of the endogenous inputs, viz., fertiliser, manure, human and bullock labour.

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