MODELLING FARMS' PRODUCTION DECISIONS UNDER EXPENDITURE CONSTRAINTS

Limited budget for the purchase of variable inputs might adversely affect producer's input use decisions and might result in a non-optimal input usage. If expenditure constrains are present and binding, unconstrained profit-maximization is not valid for modelling producers' input use decisions. In this paper we apply the indirect production function approach which describes output maximization subject to a given technology, a set of quasi-fixed inputs and a given budget for the purchase of variable inputs. By employing the indirect production function in the stochastic frontier framework we can estimate producer's output loss due to both expenditure constraints and technical inefficiency. Our estimation results show that most of the study farms were expenditure constrained during the considered period. Expenditure constraints have caused on average a potential output loss of 11 percent. Output loss due to technical inefficiency is quite moderate and averages 18 percent.