Measurement of Economic Efficiency in Pakistani Agriculture

The behav iora l and stochast ic ost f ront ier funct ions are appl ied to est imate cost inef f ic iency by farms. The behav iora l approach sat isf ies most of the assumpt ions of dual cost funct ion and the l ike l ihood ratio test rejects the market e f f ic iency hypothes is imp ly ing less than opt imum use of manures, labor, and fert i l izers. A subopt imal use is exp la ined by holding size, educat ion, credit, and subs istence needs. Smal l farms seem to be more ef f ic ient than large farms in the region. A measure of inef f ic iency based on a stochast ic ost front ier approach conf i rms the results of the behav iora l approach. Key words: agr iculture, cost funct ion, f ront ier funct ion, ineff ic iency, Pakistan. Farm efficiency, and the question of how to measure it, is an important subject in develop-ing countries ' agriculture. There are three dis-tinct approaches to measurement based on cost, profits, and production functions. Farrell devel-oped the concept of technical efficiency based on input and output relationships.l Technical in-efficiency arises when actual or observed out-put from a given input mix is less than the maximum possible; allocative inefficiency arises when the input mix is not consistent with cost minimization. Advances have been made in the frontier cost function literature using flexible functional forms (Bauer; Greene 1980; Forsund, Knox-Lovell, and Schmidt; and Schmidt). An ap-proach using systems of equations based on cost, profit, and distance functions was devel-oped to incorporate all available information o