Technical, allocative and economic ef®ciencies in swine production inHawaii: a comparison of parametric and nonparametric approaches

Khem R. Sharma

a,*

, PingSun Leung

a

, Halina M. Zaleski

b

a

Department of Agricultural and Resource Economics, University of Hawaii at Manoa, 3050 Maile Way, Gilmore Hall 112, Honolulu, HI 96822, USA

b

Department of Animal Sciences, University of Hawaii at Manoa, 1800 East±West Road, Henke Hall 106, Honolulu, HI 96822, USA

Received 2 October 1997; received in revised form 15 June 1998; accepted 8 July 1998

Abstract

Technical, allocative and economic ef®ciency measures are derived for a sample of swine producers in Hawaii using theparametric stochastic ef®ciency decomposition technique and nonparametric data envelopment analysis (DEA). Ef®ciencymeasures obtained from the two frontier approaches are compared. Firm-speci®c factors affecting productive ef®ciencies arealso analyzed. Finally, swine producers' potential for reducing cost through improved ef®ciency is also examined. Under thespeci®cation of variable returns to scale (VRS), the mean technical, allocative and economic ef®ciency indices are 75.9%,75.8% and 57.1%, respectively, for the parametric approach and 75.9%, 80.3% and 60.3% for DEA; while for the constantreturns to scale (CRS) they are 74.5%, 73.9% and 54.7%, respectively, for the parametric approach and 64.3%, 71.4% and45.7% for DEA. Thus the results from both approaches reveal considerable inef®ciencies in swine production in Hawaii. Theremoval of potential outliers increases the technical ef®ciencies in the parametric approach and allocative ef®ciencies in DEA,but, overall, contrary to popular belief, the results obtained from DEA are found to be more robust than those from theparametric approach. The estimated mean technical and economic ef®ciencies obtained from the parametric technique arehigher than those from DEA for CRS models but quite similar for VRS models, while allocative ef®ciencies are generallyhigher in DEA. However, the ef®ciency rankings of the sample producers based on the two approaches are highly correlated,with the highest correlation being achieved for the technical ef®ciency rankings under CRS. Based on mean comparison andrank correlation analyses, the return to scale assumption is found to be crucial in assessing the similarities or differences inef®ciency measures obtained from the two approaches. Analysis of the role of various ®rm-speci®c factors on productiveef®ciency shows that farm size has strong positive effects on ef®ciency levels. Similarly, farms producing market hogs aremore ef®cient than those producing feeder pigs. Based on these results, by operating at the ef®cient frontier the sample swineproducers would be able to reduce their production costs by 38±46% depending upon the method and returns to scaleconsidered.

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1999 Elsevier Science B.V. All rights reserved.

1. Introduction

Farrell's (Farrell, 1957) seminal article has led tothe development of several techniques for the mea-surement of ef®ciency of production. These techni-ques can be broadly categorized into two approaches:parametric and nonparametric. The parametric sto-chastic frontier production function approach (Aigneret al., 1977; Meeusen and van den Broeck, 1977) andthe nonparametric mathematical programmingapproach, commonly referred to as data envelopment

Agricultural Economics 20 (1999) 23±35*Corresponding author. Tel.: +1-808-956-4976; fax: +1-808-956-2811; e-mail: khem@hawaii.edu0169-5150/99/$ ± see front matter

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1999 Elsevier Science B.V. All rights reserved.PII: S0169-5150(98)00072-3

analysis (DEA) (Charnes etal., 1978) are the twomostpopular techniques used in ef®ciency analyses.Among many authors, Coelli (1995) presents themost recent review of various techniques used inef®ciency measurement, including their limitations,strengths and applications in agricultural production.The main strengths of the stochastic frontier approachare that it deals with stochastic noise and permitsstatistical tests of hypotheses pertaining to productionstructure and the degree of inef®ciency. The need forimposing an explicit parametric form for the under-lying technology and an explicit distributionalassumption for the inef®ciency term are the mainweaknesses of the parametric approach. The mainadvantages of the DEA approach are that it avoidsparametric speci®cation of technology as well as thedistributional assumption for the inef®ciency term.However, because DEA is deterministic and attributesall the deviations from the frontier to inef®ciencies, afrontier estimated by DEA is likely to be sensitive tomeasurement errors or other noise in the data.Given the different strengths and weaknesses of theparametric and nonparametric approaches, it is of interest to compare empirical performance of thetwo approaches using the same data set. However,relative to the total number offrontier studies found inthe literature, very few studies compare the twoapproaches (for example, Ferrier and Lovell, 1990;Kalaitzandonakes and Dunn, 1995; Drake and Wey-man-Jones, 1996; Hjalmarsson et al., 1996; Sharma etal., 1997a). The main objective of this paper is toestimate the technical, allocative and economic ef®-ciency measures for a sample of swine producers inHawaii using the parametric stochastic and nonpara-metric DEA approaches, and to compare the resultsobtained from the two approaches. The majority of studies aimed at comparing the two techniques havefocused mostly on technical ef®ciency. Drake andWeyman-Jones (1996) and Ferrier and Lovell(1990) are the only studies comparing the twoapproaches in terms of technical, allocative and eco-nomic ef®ciency measures. Because DEA has notbeen applied frequently in agriculture (see Coelli,1995), this paper also demonstrates its applicabilityin agriculture by using this technique in swine pro-duction. To our knowledge, Chavas and Aliber (1993)is the only study analyzing technical, allocative andeconomic ef®ciencies in agriculture using DEA.This paper extends on an earlier paper in comparingstochastic and DEA frontier analyses of a sample of swine producers in Hawaii (Sharma et al., 1997a). Theearlier paper primarily focused on the analysis of output-based technical ef®ciency. In this study, weapply the input-based approach to ef®ciency measure-ment and extend our analysis to allocative and overalleconomic ef®ciencies. The role of various ®rm-spe-ci®c factors in productive ef®ciency not considered inour earlier paper is also examined here.

2. Analytical framework

2.1. Parametric approach

As in Bravo-Ureta and Evenson (1994) and Bravo-Ureta and Rieger (1991), the parametric techniqueused in this paper follows the Kopp and Diewert(1982) cost decomposition procedureto estimate tech-nical, allocative and economic ef®ciencies.The ®rm's technology is represented by a stochasticproduction frontier as follows:

Y

i

f

X

i

Y

4

i

(1)where

Y

i

denotes output of the

i

th ®rm;

X

i

is a vectorof functions of actual input quantities used bythe

i

th ®rm;

is a vector of parameters to be esti-mated; and

4

i

is the composite error term (Aigneret al., 1977; Meeusen and van den Broeck, 1977)de®ned as

4

i

v

i

À

u

i

(2)where

v

i

s are assumed to be independently and iden-tically distributed

N

0

Y '

2

v

) random errors, indepen-dent of the

u

i

s; and the

u

i

s are nonnegative randomvariables, associated with technical inef®ciency inproduction, which are assumed to be independentlyand identically distributed and truncations (at zero) of the normal distribution with mean,

"

, and variance,

'

2

u

j

N

"Y'

2

u

j

. The maximum likelihood estimation of Eq. (1) provides estimators for

and variance para-meters,

'

2

'

2

v

'

2

u

and

'

2

u

a'

2

. Subtracting

v

i

from both sides of Eq. (1) yields

~

Y

i

Y

i

À

v

i

f

X

i

Y

À

u

i

(3)where

~

Y

i

is the observed output of the

i

th ®rm,adjusted for the stochastic noise captured by

v

i

.

24

K.R. Sharma et al./Agricultural Economics 20 (1999) 23±35

Eq. (3) is the basis for deriving the technically ef®-cient input vector and for analytically deriving thedual cost frontier of the production function repre-sented by Eq. (1).For a given level of output

~

Y

i

, the technicallyef®cient input vector for the

i

th ®rm,

X

t i

, is derivedby simultaneously solving Eq. (3) and the input ratios

X

1

a

X

i

k

i

i

b

1

, where

k

i

is the ratio of observedinputs,

X

1

and

X

i

. Assuming that the productionfunction in Eq. (1) is self-dual (e.g., Cobb±Douglas),the dual cost frontier can be derived algebraically andwritten in a general form as follows:

C

i

h

W

i

Y

~

Y

i

Y

(4)where

C

i

istheminimumcostofthe

i

th®rmassociatedwith output

~

Y

i

,

W

i

is a vector of input prices for the

i

th®rm, and

is a vector of parameters. The economic-allyef®cient inputvectorforthe

i

th®rm,

X

ei

,isderivedby applying Shephard's lemma and substituting the®rm's input prices and output level into the resultingsystem of input demand equations:

d

C

i

d

W

k

X

ek

W

i

Y

~

Y

i

Y

2

k

1

Y

2

Y

F F F

Y

m

inputs (5)where

2

is a vector of parameters. The observed,technically ef®cient and economically ef®cient costsof production of the

i

th ®rm are equal to

W

H

i

X

i

,

W

H

i

X

t i

and

W

H

i

X

ei

, respectively. These cost measures are usedto compute technical (TE) and economic (EE) ef®-ciency indices for the

i

th ®rm as follows:TE

i

W

H

i

X

t i

W

H

i

X

i

(6)EE

i

W

H

i

X

ei

W

H

i

X

i

(7)Following Farrell (1957), the allocative ef®ciency(AE) index can be derived from Eqs. (6) and (7) asfollows:AE

i

W

H

i

X

ei

W

H

i

X

t i

(8)Thus the total cost or economic inef®ciency of the

i

th ®rm

W

H

i

X

i

À

W

H

i

X

ei

can be decomposed into itstechnical

W

H

i

X

i

À

W

H

i

X

t i

and allocative

W

H

i

X

t i

À

W

H

i

X

ei

components.

2.2. Nonparametric approach

Under the nonparametric approach, DEA (Charneset al., 1978; FaÈre et al., 1985, 1994) is used to derivetechnical, scale, allocative and economic ef®ciencymeasures.Consider the situation with

n

®rms or decisionmaking units (DMUs), each producing a single outputby using

m

different inputs. Here,

Y

i

is the outputproduced and

X

i

is the (

m

Â

1) vector of inputs used bythe

i

th DMU.

Y

is the (1

Â

n

) vector of outputs and

X

isthe (

m

Â

n

) matrix of inputs of all

n

DMUs in thesample.

W

i

is the (

m

Â

1) vector of input prices for the

i

th DMU.The technical ef®ciency (TE) measure under con-stant returns to scale (CRS), also called the `overall'TEmeasure,isobtainedbysolvingthefollowingDEAmodel:min

CRS

i

!

CRS

i

subjectto

Y

i

Y

!

CRS

i

X

i

!

X

!!

!

0 (9)where

CRS

i

is a TE measure of the

i

th DMU underCRS and

!

is an

n

Â

1 vector of weights attached toeach of the ef®cient DMUs. A separate linear pro-gramming (LP) problem is solved to obtain the TEscore for each of the

n

DMUs in the sample. If

CRS

1, the DMU is on the frontier and is technicallyef®cient under CRS. If

CRS

<1, then the DMU liesbelow the frontier and is technically inef®cient. UnderCRS DEA, the technically ef®cient cost of productionof the

i

th DMU is given by

W

H

i

CRS

i

X

i

.In order to derive a measure of the total economicef®ciency (EE) index, one can solve the followingcost-minimizing DEA model (FaÈre et al., 1985, 1994)min

x

Ã

i

!

W

H

i

X

Ã

i

subjectto

Y

i

Y

!

X

Ã

i

!

X

!!

!

0 (10)where

X

Ã

i

is the cost-minimizing or economicallyef®cient input vector for the

i

th DMU, given its inputprice vector,

W

i

, and the output level,

Y

i

. The total or

K.R. Sharma et al./Agricultural Economics 20 (1999) 23±35

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