Dynamic Efficiency of German Dairy Farms Under Uncertainty

Hüttel, Silke and Narayana, Rashmi and Wagner, Christina and Martin, Odening (2017) Dynamic Efficiency of German Dairy Farms Under Uncertainty. International Journal of Business Performance Management, 18 (4). pp. 427-458.

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Abstract

Output and price uncertainty determines the optimal allocation of variable inputs, and by the same token, firms’ long-term adjustment of quasi-fixed factors. Dynamic efficiency measures, however, have thus far ignored uncertainty. To address this gap we present a model for dynamic efficiency measurement that combines a shadow cost approach with a stochastic dynamic cost-minimisation. We apply this model to western German dairy farm-level data from 1996–2010. We find that farms are more efficient in the long-run factor adjustment compared to the short-run, though they exhibit sensitivity to uncertainty. Neglecting uncertainty will overestimate average inefficiency and thus farms may appear seemingly inefficient.

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