Regional Comparative Advantage and Inefficiency in Production: Methodological and Empirical Issues.

The general objective of this study was to provide a methodological framework for evaluating stochastic comparative advantage of a crop in a multi-region multi-crop framework and its link with inefficiency at the firm level. In the first stage, regional comparative advantage, defined in terms of relative profitability, was theoretically analyzed on the basis of a firm\u27s behavior under uncertainty. The empirical application involved derivation of a comparative advantage index for major crops produced in different regions of Louisiana. The results revealed heterogenous survival potential of each crop across regions. Sugarcane was found to have comparative advantage over rice and soybeans in the Sugarcane region and over cotton and corn in the Southwest Rice region. The probable impacts on the comparative advantage due to external shocks were also derived for each crop. Next, efficiency of selected sugarcane farm-firms was evaluated. Using a panel data of forty-five firms, firm-specific technical and allocative inefficiencies were estimated via alternative model specifications. Statistical results revealed that technical efficiency of each firm has increased over time. No correlation was found between farm-size and efficiency. Allocative inefficiency was found much higher than technical inefficiency. Also, fertilizer is being used over-optimally causing high degree of allocative inefficiency. Finally, the theoretical structure derived in the first stage was extended to analyze the link between inefficiency and existing resource allocation among firms. Cost inefficiency (a combination of technical and allocative inefficiency) was estimated directly from the cost function by using the same panel data. A frontier (without inefficiency) index was derived by purging estimated inefficiencies from total cost. Comparison between frontier and observed (with inefficiency) indices revealed that an improvement in efficiency will contribute significantly to firm profitability. However, large firms in general have higher advantage than small firms with or without inefficiency. This supports the hypothesis that the disapperance of small sugarcane firms in Louisiana is not due to lower efficiency, but due to lower income generating capacity