New Econometric Evidence on Agricultural Total Factor Productivity Determinants: Impact of Funding Sources

Abstract

This paper examines the impact of public agricultural research and extension on agricultural total factor productivity at the state level. The primary emphasis, however, is on testing the hypothesis that the composition of agricultural experiment station funding—the share from federal competitive grants and contracts and from federal formula and state government appropriations—affects the productivity of public agricultural research. We use an econometric model of total factor productivity for the agriculture sector, where instruments are created for key regressors and annual data for the 48 contiguous states over the 30-year period 1970-1999. Our results show that public agricultural research and agricultural extension have statistically significant positive impacts on state agricultural productivity. Also, the composition of SAES funding matters; an increase in federal competitive grant funding at the expense of federal formula funding for state agricultural experiment stations lowers the productivity of public agricultural research significantly. From a cost-benefit perspective, our study shows that the social marginal annualized real rate of return to public resources invested in agricultural research is 49- to 62- percent, and to public agricultural extension, it is even larger.