Farm size, inefficiency, and rice production cost in China

Abstract

The relationship between farm size and production cost, especially inefficiency cost, has been a hotly debated topic for decades, but no general conclusion has been reached. This subject has particularly important implications for agricultural policies in China, which is in the course of rapid structural change. We decompose the production cost into frontier cost, technical inefficiency cost and allocative inefficiency cost with a primal system approach, and we demonstrate that technical inefficiency cost increases but allocative inefficiency cost decreases as farm size increases. In addition, large-scale farms gain the overall cost advantage due to their lower allocative inefficiency cost. We also find that a minimum purchase price higher than all farm costs impedes the enhancement of scale and masks the competitiveness of China. Moreover, the determinants of inefficiency costs imply that region-specific market imperfection holds a considerable explanatory power for the allocative inefficiency costs.