Decomposing Partial Factor Productivity in the Presence of Input-Specific Technical Inefficiency: A Stochastic Production Frontier Approach

The present paper provides a new methodological approach for the decomposition of partial factor productivity in the presence of input-specific technical inefficiency. Based on Kuroda’s methodological approach and using the theoretical foundations developed by Kopp, we decompose the growth rate of partial factor productivity into four sources, namely, changes in input-specific technical efficiency, substitution effect, technical change and productivity effect. The empirical model is based on a generalized self-dual Cobb-Douglas stochastic production frontier and on the methodological approach for measuring non-radial input-specific technical efficiency suggested by Reinhard, Lovell and Thijssen. The model is applied to a cross-section data set of 723crop farms in Greece during the 1994-2003 period obtained from FADN. The empirical results suggest that the labor productivity of crop farms has been increased by 2.63 per cent annually. Technical change was found to be the main source of labour productivity (71.6%), while changes in technical efficiency also contributed significantly over the period analyzed (38.2%). On the other hand, substitution effect was found to affect negatively the rate of labour productivity (19.9%). Introduction The measurement of productivity growth and the identification of the factors that affect it was always an aspect of great interest for the economists. Productivity growth is the key variable that can ensure a continuously economic growth with a relative low cost. This fact is even more evident in the agricultural sector, where production faces many limitations because of the inelastic supply of the primal factors (labour, land). Given these limitations, changes in productivity growth seem to be the answer to the question how the world will be able to feed itself in the next decades, in the sense that high rates of factor productivity growth in the agricultural sector is a necessary presupposition for a self-sufficient economy (Mergos and Karagiannis). Furthermore, the increase of income in the Western countries in combination with the increase of population requires, necessarily, a growth in agricultural production. Productivity