Handbook of Agricultural Economics. Volume 1A: Agricultural Production. Handbooks in Economics 18

836 Pages·2001·12.43 MB·english

by  Bruce L. Gardner

INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer devel-
opments, from recent journal articles and discussion papers. Some original material is
also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for profes-
sional collections but also possible supplementary readings for advanced courses for
graduate students in economics.
KENNETH J. ARROW and MICHAEL D. INTRILIGATOR
PUBLISHER' S NOTE
For a complete overview of the Handbooks in Economics Series, please refer to the
listing on the last two pages of this volume.
CONTENTS OF THE HANDBOOK
VOLUME 1A
PART 1 - AGRICULTURAL PRODUCTION
retpahC 1
Production and Supply
YAIR MUNDLAK
retpahC 2
Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers
GIANCARLO MOSCHINI and DAVID A. HENNESSY
retpahC 3
Expectations, Information and Dynamics
MARC NERLOVE and DAVID A. BESSLER
retpahC 4
The Agricultural Innovation Process: Research and Technology Adoption in a Changing Agricultural Sector
DAVID SUNDING and DAVID ZILBERMAN
retpahC 5
Structural Change in Agricultural Production: Economics, Technology and Policy
JEAN-PAUL CHAVAS
retpahC 6
Land Institutions and Land Markets
KLAUS DEININGER and GERSHON FEDER
retpahC 7
Human Capital: Education and Agriculture
WALLACE E. HUFFMAN
retpahC 8
Women's Roles in the Agricultural Household: Bargaining and Human Capital Investments
.T PAUL SCHULTZ
retpahC 9
Human Capital: Migration and Rural Population Change
J. EDWARD TAYLOR and PHILIP L. MARTIN
retpahC 01
Agricultural Finance: Credit, Credit Constraints, and Consequences
PETER J. BARRY and LINDON J. ROBISON
vii
viii Contents of the Handbook
Chapter 11
Economic Impacts of Agricultural Research and Extension
ROBERT E. EVENSON
Chapter 12
The Agricultural Producer: Theory and Statistical Measurement
RICHARD E. JUST and RULON D. POPE
VOLUME 1B
PART 2 - MARKETING, DISTRIBUTION AND CONSUMERS
Chapter 13
Commodity Futures and Options
JEFFREY C. WILLIAMS
Chapter 14
Storage and Price Stabilization
BRIAN WRIGHT
Chapter 15
Food Processing and :noitubicasiD An Industrial Organization Approach
RICHARD J. SEXTON and NATHALIE LAVOIE
Chapter 16
Marketing Margins: Empirical Analysis
MICHAEL K. WOHLGENANT
Chapter 17
Spatial Price Analysis
PAUL L. FACKLER and BARRY K. GOODWIN
Chapter 18
Duality for the Household: Theory and Applications
JEFFREY .T LaFRANCE
Chapter 19
Economic Analysis of Food Safety
JOHN M. ANTLE
Chapter 20
Marketing and Distribution: Theory and Statistical Measurement
JAMES VERCAMMEN and ANDREW SCHMITZ
Chapter 21
Production and Marketing
RACHAEL E. GOODHUE and GORDON C. RAUSSER
INTRODUCTION
The subject matter of agricultural economics has both broadened and deepened in re-
cent years, and the chapters of this Handbook present the most exciting and innovative
work being done today. The field originated early in the twentieth century with a focus
on farm management and commodity markets, but has since moved far into analysis
of issues in food, resources, international trade, and linkages between agriculture and
the rest of the economy. In the process agricultural economists have been pioneering
users of developments in economic theory and econometrics. Moreover, in the process
of intense focus on problems of economic science that are central to agriculture - mar-
ket expectations, behavior under uncertainty, multimarket relationships for both prod-
ucts and factors, the economics of research and technology adoption, and public goods
and property issues associated with issues like nonpoint pollution and innovations in
biotechnology - agricultural economists have developed methods of empirical investi-
gation that haveb een taken up in other fields.
The chapters are organized into five parts, contained in two volumes. Volume 1 con-
tains Part ,1 "Agricultural Production", and Part 2, "Marketing, Distribution and Con-
sumers". These two parts include much of the traditional scope of agricultural eco-
nomics, emphasizing advances in both theory and empirical application of recent years.
Volume 2 consists of three parts: "Agriculture, Natural Resources and the Environment",
"Agriculture in the Macroeconomy", and "Agricultural and Food Policy". Although
agricultural economists have always paid attention to these topics, research devoted
to them has increased substantially in scope as well as depth in recent years.
A large-scale effort to review and assess the state of knowledge in agricultural eco-
nomics was previously undertaken by the American Agricultural Economics Associ-
ation (AAEA), with publication in four volumes from 1977 to 1992.1 Those earlier
survey volumes have strikingly different subject-matter content from that of the present
Handbook, especially considering that they described the same field only 20 years ago.
The AAEA volumes have extensive coverage off arm management issues, costs of pro-
duction in agriculture, and estimates of efficiency of marketing firms. In our judgment
little in any fundamental way has been added to our knowledge in these areas, and
applications have become routine rather than imaginative research. The largest AAEA
volume was devoted entirely to agriculture in economic development. This remains a
1 A Survey of Economics Literature, eeL ,nitraM ed., :silopaenniM ytisrevinU of atosenniM .sserP -loV
emu ,1 lanoitidarT dleiF of larutlucirgA scimonocE ;)7791( emuloV ,2 evitatitnauQ sdohteM ni larutlucirgA
scimonocE emuloV ;)7791( ,3 scimonocE of ,erafleW laruR ,tnempoleveD dna larutaN secruoseR ;)1891(
emuloV ,4 erutlucirgA cimonocE ni tnempoleveD .)2991(
xi
x Introduction
most important topic, but we cover it in only one complete chapter and parts of sev-
eral others. This reflects in part the integration of work on developing countries with
mainstream applied work. For example, our chapters on production economics, expec-
tations, and risk management also encompass applications to agriculture in developing
economies.
That integration points to another gradual but notable change in agricultural
economists' research. The AAEA surveys had most of the chapters of one volume de-
voted to quantitative methods. We do not have any separate methodological chapters.
In contrast, we have several chapters with substantial development of economic theory.
This reflects an evolution in the research priorities of leading agricultural economists
who, following the earlier work of Nerlove on supply and Griliches on technological
change, are working at the theoretical frontiers and simultaneously undertaking empiri-
cal work - not just purveying new theories to their more "applied" colleagues.
As its title indicates, the AAEA volumes were surveys of literature, and aimed at
completeness of coverage within their subject matter. We asked our authors to be se-
lective, to focus on what they saw as the main contributions to the area they covered,
and to assess the state of knowledge and what remains to be learned. This approach
has left some gaps in our coverage, and has given us some chapters that are perhaps
more idiosyncratic than is usual for a survey chapter. In order to pull things together at
a higher level of aggregation, we commissioned five "synthesis" chapters, one for each
of the five parts of the Handbook. And, to provide our own even broader overview, the
editors have written closing syntheses of each volume. Because these syntheses provide
capsule summaries of each Handbook chapter, we will not present further description
of content here.
Although advances in research in agricultural economics are increasingly being made
in many countries, our authors and coverage of applied topics is heavily U.S.-weighted
(only six authors work outside of the U.S.: two in Europe, two in Australia, one in
Canada, and one in Israel). Of those in the U.S., however, six are economists at the
World Bank, an international rather than American institution. Probably in another
twenty years or so one will have to become more international to capture the most
interesting and exciting developments in the field, but that day has not arrived yet.
Among the many debts we have accrued in the preparation of this Handbook, the most
important was Rachael Goodhue. She not only assessed the substance of many chapters,
but she persuaded many reviewers and authors alike to complete their assigned respon-
sibilities. Other critical contributors include the dedicated staff who provided support at
the University of California, Berkeley, and at the University of Maryland. At Maryland,
Liesl Koch served as copy editor and guided the authors' final revisions and preparation
of the manuscript with sure judgment and a finn but diplomatic hand, a job best likened
to driving a herd of cats. Coordination of correspondence with authors and reviewers
was organized and carried out at Berkeley with exemplary efficiency and organizational
skill by Jef Samp, Jessica Berkson, and Jennifer Michael, under the direction of Nancy
Lewis.
Introduction ix
eW also want to recognize the comments and suggestions received from 54 review-
ers of chapter drafts: Julian Alston, Jock Anderson, Richard Barichello, Eran Beinen-
baum, Michael Boehlje, Dan Bromley, Steve Buccola, Allan Buckwell, David Bul-
lock, Michael Caputo, Jean-Paul Chavas, John Connor, Klaus Deiniuger, Jeffrey Doff-
man, Marcel Fafchamps, Gershon Feder, Joe Glauber, Dan Gilligan, Rachael Goodhue,
Tom Grennes, Zvi Griliches, Geoff Heal, Eithan Hochman, Matt Holt, Wallace Huff-
man, D. Gale Johnson, Zvi Lerman, Erik Lichtenberg, Ethan Ligon, Alan Love, Jill
McCluskey, Mario Miranda, Arie Oskam, Dick Perrin, Mark Rosegrant, Vern Ruttan,
Ed Schuh, Kathleen Segerson, Larry Sjaastad, Spiro Stefanou, Jo Swinnen, Frans van
der Zee, Finis Welch, Abner Womack, and Jacob Yaron.
BRUCE GARDNER
GORDON RAUSSER
Chapter 1
PRODUCTION AND SUPPLY
YAIR MUNDLAK
Faculty of Agriculture, The Hebrew University of Jerusalem, Rehovot, Israel
Contents
Abstract 4
.1 Primal estimates or the Cobb-Douglas culture 5
1.1. The setting of the agenda 5
1.2. A simple production model 9
1.3. Productivity 12
1.4. The productivity of capital 16
1.5. Productivity and heterogeneous technology 16
1.6. Heterogeneous technology 18
1.7. Cross-country studies 20
1.8. The rate of technical change 26
1.9. Primal estimates - summary 27
2. The duality culture 28
2.1. Studies based on cost functions 32
2.2. What is the message? 35
2.3. Studies based on profit functions 36
2.4. Dual estimates - summary 39
3. Multiproduct production 40
4. Nonparametric methods 43
4.1. Description 43
4.2. Discussion 45
5. Supply analysis 47
5.1. Background 47
5.2. Static analysis 49
6. Dynamics 51
6.1. The firm's problem 51
6.2. Discussion 53
6.3. The role of prices and technology 53
6.4. Disinvestment 55
6.5. Empirical investment analysis 56
6.6. Exogenous dynamics 57
Handbook of Agricultural Economics, Volume ,1 Edited by B. Gardner and .G Rausser
© 2001 Elsevier Science B.V. All rights reserved
Y kaldnuM
.7.6 suonegodnE scimanyd - eht lamirp hcaorppa 58
.8.6 suonegodnE scimanyd -the laud hcaorppa 59
.9.6 laciripmE tnemtsevni sisylana ni erutlucirga 61
.01.6 cimanyD rotcaf dnamed gnisu ytilaud 63
.11.6 noissucsiD 68
7. The scope for policy evaluation 71
.1.7 yrammuS dna snoisulcnoc 73
Acknowledgement 77
References 77
Abstract
The work of more than 50 years aimed at gaining empirical insight into the production
structure of agriculture and the related modes of farmers' behavior is reviewed, and
orders of magnitude of the various parameters of interest are quoted. The review follows
the lines of the evolution of the pertinent research, and it builds on it in forming a
general framework for empirical work. This approach broadens the scope of producers'
decisions to include the choice of the implemented technology and it also overcomes
statistical problems that have accompanied the relevant research for a long time.
JEL classification: Q11
.hC :1 noitcudorP dna ylppuS 5
Technology along with the competitive conditions constitute the core of the supply side
of the economy. There is hardly a subject in economics that can be discussed with pro-
duction sitting in the balcony rather than playing center stage. To mention the main
favorable subjects in agricultural economics research: product supply, factor demand,
technical change, income distribution, the relationships between factor prices and prod-
uct prices, the competitive position of agriculture, returns to scale, the size distribution
of firms, and capital accumulation. The nature of the relationships and the conclusions
derived in any particular analysis depend on the order of magnitude of the parameters
in question. Hence, whether we want it or not, the empirical analysis of technology and
its changes is of cardinal importance, and measurement problems are pertinent even if
on the surface it seems that the subject matter is not 'technical'.
In this review, we deal with the various aspects of the analysis. As will become clear,
much of the discussion in the literature is methodology driven, not always accompanied
by substantive applications. Inasmuch as methodological innovations are desirable, the
question is how do they help us to think of, or deal with, specific issues of interest.
This is a question that the reader should try to answer for himself, depending on his
particular interest. To assist in this endeavor, we summarize here the empirical findings
that bear on the main parameters of interest and address some important methodological
issues essential to the interpretation of empirical studies and to future research. In many
cases, the empirical results display a wide range and thus highlight the need for an
appropriate framework for their evaluation. The choice of subjects and the coverage in
the discussion are carried out with the purpose of constructing a uniform framework to
meet the purpose. This is built on the cumulative experience and contributions provided
by numerous studies and on the evolution of the thinking that is so valuable in the
reading and the interpretation of the data. To emphasize this aspect, the subjects are
introduced largely in an Order that highlights this evolution.
There are two fairly distinct periods in the study of agricultural production functions:
before and after duality. The changing of the guard was in the early 1970s, although
a few studies employing direct estimation continue to appear after 1970. The appear-
ance of duality changed not only the method of estimation but also the questions asked
to the extent that there is little continuity in the subjects of interest. This can be ac-
counted for by the fact that much of the work is methodology-driven rather than being
an indication that the old questions had been adequately answered or of any explicit
agenda.
1. Primal estimates or the Cobb-Douglas culture
1.1. The setting of the agenda
It seems that the empirical work on agricultural production functions originated in a
methodological paper by Tintner (1944) and an application by Tintner and Brownlee
(1944), which appeared as a short paper in the Notes section of the Journal of Farm
6 E Mundlak
Economics and was followed by a full size paper by Heady (1946). This work was
influenced by the work of Cobb and Douglas (1928). 1 It thus took about fifteen years to
adopt the work of Cobb and Douglas in agricultural economics application.
These studies used data from a random sample of Iowa farms for 1939. The data were
classified by area of the state, type, and also size of farm. The inputs included were land,
labor, equipment, livestock and feed, and miscellaneous operating expense, a classifi-
cation that is still applicable today. Interestingly, this early work anticipated some of
the more difficult subjects in the empirical work of production functions. Management
was recognized as an input, but "the productive agent management has been excluded
since there is no satisfactory index of inputs for this factor" Tintner and Brownlee
(1944, p. 566). Allusions were also made to the importance of input quality. 2 Heady
(1946) expressed similar concerns about the quality issue and the omission of man-
agement. 3 Also, based on the criticism of the Cobb--Douglas work that appeared at
that time by Reder (1943 ), Bronfenbrenner (1944), and Marschak and Andrews (1944),
Heady (1946) noted that "Ithe functions which have been derived ... are of the inter-
firm rather than intrafarm variety ... it can he expected that a multitude of functions
exists ... because of the varying combinations of techniques employed and commodi-
ties produced" (p. 999). This is a recognition of the problems caused by aggregation
over techniques. Similarly, Smith (1945) observed that firms in cross section may em-
ploy different techniques, particularly due to fixed plants inherited from the past, and the
long-run production functions so derived may represent "mongrels" or hybrids. Aside
from the question of input quality, Bronfenbrenner (i 944) raised the point that capital
and labor are not on the same footing because labor is a flow ("quantity used"), whereas
capital is a stock (representing the "available quantity"). This can be interpreted as an
early recognition of the conceptual problem of the evaluation of the productivity of
durable inputs.
These studies were concerned with the contribution of inputs to output variations and
with a comparison of the factor productivity on different farm types and the relationship
to their returns. The estimated production elasticities reported by Tintner and Brownlee
(1944) for the sample as a whole are: land, 0.34; labor, 0.24; and other assets and vari-
able inputs, 0.41. The sum is 0.99. Heady used a larger sample and a somewhat different
classification of inputs to obtain for the sample as a whole: land, 0.23; labor, 0.03; and
other assets and variable inputs, 0.59. The sum is 0.85.
1 A noisserger noitauqe linear in eht smhtiragol "is ralimis to eht noitcudorp function employed by luaP
salguoD in sih laciripme "seiduts rentniT dna eelnworB ,4491( .p .)765 nO eht history of eht salguoD-bboC
noitcudorp ,noitcnuf ees salguoD .)6791(
2 "Using eht number of serca ni eht farms sa a erusaem of stupni of land serongi snoitairav ni eht quality of
.dnal gnirusaeM stupni of labor in smret of shtnom of labor also serongi snoitairav in eht ytilauq dna ytisnetni
of ,robal ylralucitrap that of rotarepo dna sih family" rentniT dna eelnworB ,4491( .p .)665
3 At eht time eht issue of tnemeganam bias saw ,dezingocernu erofereht both papers detaluceps that dah
tnemeganam been ,dedulcni eht mus of eht ,seiticitsale sa a erusaem of snruter to ,elacs would have desaercni
reutniT dna eelnworB ,4491( .p ,)965 Heady ,6491( .p 995). ,revewoH Heady also setacidni that eht mus of
eht seiticitsale might have desaerced eud to eht noitcudortni of tnemeganam ,,dibI( .p .)799