Measuring the Economic Efficiency of Italian Agricultural Enterprises

Abstract

Early microeconomic theory established its framework under the assumption that producers’ behavior is optimal towards input allocation and output level. Since Debreu and Farrell this basic neoclassical approach has been extended, allowing for producers’ decisions to diverge from the optimum production choice. The generally accepted reason for production units not to be efficient regards the presence of technical or allocative inefficiency components in their production function. Therefore one of the main objectives of studying production and cost frontiers is to estimate their efficiency towards input utilization and allocation. This paper aims to measure the technical efficiency of agricultural enterprises in Italy during the period 2003 – 2007 by applying a stochastic frontier analysis to panel data. The developed two-sectored model distinguishes between agricultural production function and non-agricultural production function. The variables included in the first production function are related directly to the final product and are utilized during the production process. The non-agricultural production function includes two categories of variables: the first accounts for the general characteristics of the agricultural enterprises, while the second attempts to describe the opportunities and restrictions of the institutional framework.