Abstract
AbstractWe introduce the concept “excess capital capacity” and employ a stochastic input requirement frontier to measure excess capital capacity in agricultural production. We also propose a two‐step estimation method that allows endogenous regressors in stochastic frontier models. The first step uses generalized method of moments to get consistent estimates of the frontier parameters in the presence of endogenous regressors. The second step uses maximum likelihood to measure excess capital capacity and evaluate the factors that influence it. The empirical application to Dutch cash crop farms found varying degrees of excess capital capacity. The policy implications of excess capital capacity are discussed.
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