Technical, Allocative and Economic Efficiency of Rice Farms in Bangladesh

Abstract

This study estimates the efficiency of rice farms in Bangladesh by applying stochastic production frontier and data envelopment analysis (DEA) methods. Technical, allocative and economic efficiency of 205 individual farms are measured by using cross-section data for consecutive two rice seasons. The stochastic Cobb­Douglas production frontier is first applied to estimate technical efficiency of farms. Then we apply stochastic cost decomposition method to estimate allocative and economic efficiency. Constant Return to Scale (CRS) and Variable Return to Scale (YRS) input­oriented and output-oriented DEA frontiers are estimated. The CRS frontier produces measures of overall technical efficiency and the YRS frontier produces measures of pure technical efficiency. Scale efficiency is obtained as the ratio of the two. Technical, allocative and economic efficiencies, obtained from both stochastic and DEA frontiers for aman and boro seasons, are compared. Tobit Inefficiency Effects Model is applied to identify factors which affect inefficiency. The average scores of technical, allocative and economic efficiencies obtained from stochastic frontier method are 84, 71 and 58 per cent respectively for aman season and the corresponding values are 87, 75 and 64 per cent respectively for boro season. Both input- and output oriented methods give same results for aman season. The mean TE scores of CRS, YRS and SE for aman season from both orientations are 77, 83 and 92 per cent respectively. The corresponding values from input oriented method are 75, 81 and 93 per cent and from output oriented method are 75, 81 and 92 per cent respectively for boro season. The average technical, allocative and economic efficiencies obtained from CRS DEA are 77, 90 and 69 per cent respectively and corresponding YRS DEA technical, allocative and economic efficiencies are 83, 90 and 75 per cent respectively for aman season. On the other hand, the average CRS DEA technical, allocative and economic efficiencies are 75, 84 and 63 per cent respectively and the corresponding YRS DEA values are 81, 89 and 72 per cent respectively for boro season. The efficiency estimates from both stochastic frontier and DEA approach for boro season are slightly higher than those from aman season, as expected. According to stochastic frontier results 16 per cent technical efficiency (TE), 29 per cent allocative efficiency (AE) and 42 per cent economic efficiency (EE) could be improved in aman season and 13 per cent TE, 25 per cent AE and 36 per cent EE could be improved in born season if the farmers could operate at full efficiency levels. CRS DEA frontier shows that 23 per cent TE, 10 per cent AE and 31 per cent EE could be increased in aman season and 25 per cent TE, 16 per cent AE and 37 per cent EE could be increased boro season by the same way. Similarly, YRS DEA results indicate that 17 per cent TE, 10 per cent AE and 25 per cent EE could be improved in aman season and 19 per cent TE, 11 per cent AE and 28 per cent EE could be enhanced in boro season if the farmers could operate at full efficiency levels. Inefficiency effects model shows that land size, credit facilities, quality extension services are inversely related to inefficiency of farms in both seasons. Environmental factor, such as land degradation, is directly related with inefficiency. Policies should be taken to reduce land fragmentation, to increase rural credit facilities and the quality extension services, and also to reduce factors which cause land degradation. As a result, technical, allocative and economic efficiencies could be improved which leads to reduction of cost of production. This enhances the income and welfare of the farmers.