Framework for Assessing Efficiency of Farms and Agrarian Organisations

Abstract

Broadly applied traditional frameworks for assessing efficiency of economic organizations in agriculture are (only) based on the 'technical efficiency' of the factors of production and the 'productivity of employed resources'. They compare the levels of efficiency of farms of different types, sectors, and countries without taking into account the transaction costs and the specific economic, institutional and natural environment of their development. At the same time, other agrarian organizations (contracts, associations, markets, public and hybrid forms) are not considered as alternative economic structures and are either ignored or studies separately. This paper suggests a new approach for assessing efficiency of economic organizations and public intervention in agriculture incorporating achievements of the interdisciplinary New Institutional Economics. Presented new approach includes: studying out the farm and agrarian organizations as a governing rather than a production structure; assessment of the comparative efficiency of alternative market, contract, internal, and hybrid modes of governance on the base of their potential to minimize production and transaction costs and to maximize the production and transaction benefits; analysis of the level of transaction costs and their institutional (distribution of rights and obligations, and the systems of their enforcements), behavioral (preferences, bounded rationality and opportunism of individuals), dimensional (uncertainty, frequency, assets specificity and appropriability of activity/transactions), technological (non-separability, economies of scale and scope) and natural factors; and determination of adequate criteria of farm efficiency and its effective boundaries – the potential to increase productivity of resources with minimum transaction costs comparing to a practically possible alternative organization. The new approach is also used to precise the needs for public interventions ('the economic role of government') in agrarian sector and to assess the comparative efficiency of alternative forms of public involvement. The analysis of socio-economic and natural environment and the transaction costs identifies a multiple cases of 'market and private failures' associated with non-identified or badly assigned property rights, ineffective system of enforcement of absolute and contracted rights, high uncertainty and dependency of activity, low appropriability, needs for collective actions etc. which necessitate a third-party public intervention in market and private sectors. The individual forms of public involvement (institutional modernization, assistance, regulation, taxation, hybrid or internal organization) are with unequal efficiency in the specific environment of different countries, regions, and sectors, and the most efficient one(s) is/are to be selected with taking into account the total (direct, private, public, transaction, third-party etc.) costs and the contribution to the sustainable development. Nevertheless, 'the public failure' is feasible and bad interventions, delayed, under or over-regulations, miss-management, corruption etc. are widespread and as a result the sustainable development of the sector is compromised.