What drives the overall technical efficiency of farm businesses in the Wheatbelt of Western Australia? Analysis of persistent and transient efficiencies in the presence of firm effects

Abstract

AbstractThis study enhances our comprehension of the performance of farm businesses in Western Australia by estimating persistent and transient technical efficiency measures in the presence of firm‐level effects. The analysis is based on a balanced panel data set of 54 farm businesses from the years 2002 to 2011. We employ Kumbhakar et al.'s (2014, Journal of Productivity Analysis, 41, 321) model to estimate persistent efficiency and firm effects separately, as well as Kumbhakar's and Heshmati's (1995, American Journal of Agricultural Economics, 77, 660) model where these two factors are confounded. Furthermore, we investigate the factors that influence transient and persistent technical efficiency. Our findings reveal that failing to differentiate between persistent technical efficiency and firm effects underestimates the estimates of persistent and overall technical efficiency. This underestimation may result in misguided policy recommendations for improving the technical performance of farm businesses. We also find that persistent efficiency dominates overall technical efficiency. The significant determinants of persistent overall technical efficiency include the regional rainfall zone where a farm business is located, the managerial competency of the farm operator denoted by their age and off‐farm activities. Off‐farm income plays a crucial role in determining transient technical efficiency.