THE IMPACT OF SUPPORT POLICIES ON TECHNICAL EFFICIENCY OF FARMS IN KOSOVO

Abstract

The effects of support policies on technical efficiency are not clear and are very complex because the results may be either positive or negative. The effects can be positive if the money received will serve as an incentive to innovate or to switch to new technologies or can have a negative effect if the money received increase the income of the farms and as a result prefer to have more leisure time. Given the theoretical uncertainty of the impact of supporting policies on efficiency, productivity and added value, the aim of this paper is to address this issue empirically. This paper contributes to the literature for the case of Kosovo by fulfilling the following objectives (i) to measure technical efficiency of farms in Kosovo and (ii) to identify the effect of subsidies by employing a stochastic output distance function and an inefficiency effect model as the one proposed by Battese and Coelli (1995). Parametric stochastic frontier approach was employed to estimate technical efficiency and to determine the effect of exogenous variables on technical efficiency through one-step approach. The share of total subsidies to total output (%) was used as proxy for policy variable and a set of farm characteristics as exogenous variables. We used FADN of Kosovo data provided by MAFRED for 2014. The results suggest that on average a farm in Kosovo produced 15.7% of the maximum output, while the rest of the potential output was lost due to technical inefficiency. Subsidies had negative effect on technical efficiency, however insignificant.