INDIVISIBLE AND SPATIAL COMPONENTS OF DAIRY FIRM EFFICIENCY

This paper contrasts nonparametric data envelopment analysis (DEA) and free disposal hull (FDH) representations of dairy technology to determine whether factor indivisibilities and firm-specific location components affect economic performance. Location and capital structure variables, in addition to technology and firm structure, are used in a second-stage model to explain firm inefficiency using a Tobit estimator. Capital structure and location factors are correlated with firm efficiency in the DEA models but not the FDH indicating that the FDH representation may account for these factors in the in the first-stage efficiency modeling. Results indicate that failing to control for firm-specific spatial constraints and capital divisibilities will bias inefficiency estimates and overestimate the potential gains to economic policy designed to improve firm performance