An economic analysis of production efficiency: Evidence from Irish farms

Abstract

The objective of this paper is to investigate the economics of production efficiency of dairy farms, with a specific focus on the role of agricultural policy. Our analysis is based on a representative sample of Irish dairy farms, ranging from 2000 to 2018, which includes a period of major change in EU dairy policy. Based on a multi-input multi-output production system, we first estimate technical, allocative, scale and scope efficiencies. We find significant heterogeneity in technical and allocative efficiencies, which change over time. We also calculate shadow prices of milk quota, which suggest that milk quotas restricted many farmers and limited their ability to produce milk. Finally, we explore determinants of technical, allocative, scale and overall inefficiencies using random panel-data censored regression. We find that subsidies are positively associated with farm efficiency, but the effects vary over distinct quota abolition periods. Overall, our empirical findings indicate that agricultural policy had important effects on the managerial effectiveness of farmers.