Abstract
The Debreu–Farrell measure of technical efficiency is widely used to benchmark firm performance. A limitation of this measure is that it is orientation restricted and evaluates the performance of a decision-making unit in an explicit direction relative to the best-practice frontier and not the most productive point on the frontier. Therefore, the measure does not provide policy insight on how to direct decision-making units to achieve the best possible productivity level. Taking a departure from conventional nonparametric benchmarking studies, this study benchmarks the performance of commercial farm businesses in the Western Australia’s wheatbelt region using total factor productivity efficiency (‘TFP efficiency’) and compares the results to those when the conventional technical efficiency measures are applied. We find that the two measures of firm performance differ and are influenced by different sources of firm heterogeneity. Therefore, derived policy insights and prescriptions also differ. This is an important insight that policymakers and practitioners need to be aware of.
Highlights
Agricultural productivity growth is essential for feeding the world’s growing population, improving food security, and lessening the need to bring virgin land into agricultural production (ERS 2019)
The TFP efficiency measure associated with O’Donnell (2008) is an alternative metric for benchmarking performance that measures the ratio of the total factor productivity of a decision-making unit to that of the maximum TFP that is possible in each production period given the available production technology and environment
This study presents an analysis of TFP efficiency as a performance benchmark and compares it to the widely adopted measure of Debreu–Farrell technical efficiency, exposing that gains in technical efficiency may not necessarily yield improvements in firm productivity
Summary
Agricultural productivity growth is essential for feeding the world’s growing population, improving food security, and lessening the need to bring virgin land into agricultural production (ERS 2019). TFP efficiency, unlike conventional technical efficiency, is not orientation restricted, i.e., it is not estimated from an output or input-oriented perspective (O’Donnell 2008) Despite these differences and their implications on how researchers and policymakers use empirical results of performance benchmarking to design policies to improve productivity and overall competitiveness of enterprises, no study has sought to clearly differentiate between TFP efficiency and technical efficiency as measures of firm managerial performance and investigate whether they are influenced by similar sources of firm heterogeneity. The study shows that factors contributing to variability in technical efficiency may not contribute to variability in TFP efficiency across farms, implying that policy measures derived from estimates of determinants of technical efficiency may not necessarily be relevant for designing policies to improve farm productivity and competitiveness This insight has broader implication for performance benchmarking of decision-making units in the non-agricultural sectors of the economy. This type of analysis is important in understanding which management practices and policy measures are associated with higher levels of efficiency and productivity
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