IDEAS home Printed from https://ideas.repec.org/a/bla/agecon/v52y2021i1p37-50.html
   My bibliography  Save this article

Are Kansas farms profit maximizers? A stochastic additive error approach

Author

Listed:
  • Yacob Abrehe Zereyesus
  • Allen M. Featherstone
  • Michael R. Langemeier

Abstract

Profit maximization is widely assumed as a behavioral objective in agricultural economics research. This paper applies deterministic and stochastic tests to examine adherence of a sample of Kansas farms to the profit maximization hypothesis. A modification of Varian's stochastic method is developed to account for farms that have zero netput. Results indicate that none of the farms satisfy the joint hypothesis of profit maximization and nonregressive monotonic technological change under the deterministic case. Results support the existence of nonregressive technological change during the study period for the sample of Kansas farms. Using a rejection criterion of 10% for measurement error in quantity data, most of the sample of Kansas farms (81% based on the additive error model and 92% based on the proportional error model) adheres to joint hypothesis of profit maximization and nonregressive monotonic technological change. The consistency with profit maximization is stronger for those farms that do not enter and exit in the production of an output.

Suggested Citation

  • Yacob Abrehe Zereyesus & Allen M. Featherstone & Michael R. Langemeier, 2021. "Are Kansas farms profit maximizers? A stochastic additive error approach," Agricultural Economics, International Association of Agricultural Economists, vol. 52(1), pages 37-50, January.
    • Handle: RePEc:bla:agecon:v:52:y:2021:i:1:p:37-50
    DOI: 10.1111/agec.12605
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/agec.12605
    Download Restriction: no
    File URL: https://libkey.io/10.1111/agec.12605?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Sitienei, Isaac & Gillespie, Jeffrey & Scaglia, Guillermo, 2020. "U.S. Grass-Fed Beef Producers: Goal Structure and Reasons for Enterprise Selection," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 52(1), pages 78-95, February.
    2. Masato Nakane & Loren Tauer, 2009. "Empirical dairy profits under fluctuating prices," Applied Economics, Taylor & Francis Journals, vol. 41(1), pages 5-15.
    3. Lim, Hongil & Shumway, C Richard, 1992. "Profit Maximization, Returns to Scale, and Measurement Error," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 430-438, August.
    4. Loren W. Tauer, 1995. "Do New York Dairy Farmers Maximize Profits or Minimize Costs?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(2), pages 421-429.
    5. Chavas, Jean-Paul & Cox, Thomas L, 1990. "A Non-parametric Analysis of Productivity: The Case of U.S. and Japanese Manufacturing," American Economic Review, American Economic Association, vol. 80(3), pages 450-464, June.
    6. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-275, March-Apr.
    7. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-598, October.
    8. Prajit K. Dutta & Roy Radner, 1999. "Profit Maximization and the Market Selection Hypothesis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(4), pages 769-798.
    9. Mugera, Amin W. & Langemeier, Michael R., 2011. "Does Farm Size and Specialization Matter for Productive Efficiency? Results from Kansas," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 43(4), pages 515-528, November.
    10. Cox, Thomas L & Chavas, Jean-Paul, 1990. "A Nonparametric Analysis of Productivity: The Case of U.S. Agriculture," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 17(4), pages 449-464.
    11. Jean-Paul Chavas & Thomas L. Cox, 1992. "A Nonparametric Analysis of the Influence of Research on Agricultural Productivity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(3), pages 583-591.
    12. Ziv Bar-Shira & Israel Finkelshtain, 1999. "Simple Nonparametric Tests of Technological Change: Theory and Application to U.S. Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 850-864.
    13. Craig S. Hakkio, 2008. "PCE and CPI inflation differentials: converting inflation forecasts," Economic Review, Federal Reserve Bank of Kansas City, vol. 93(Q I), pages 51-68.
    14. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    15. Loren Tauer & Zdenko Stefanides, 1998. "Success in maximizing profits and reasons for profit deviation on dairy farms," Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 151-156, February.
    16. Chris Fawson & C. Richard Shumway, 1988. "A Nonparametric Investigation of Agricultural Production Behavior for U.S. Subregions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(2), pages 311-317.
    17. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
    18. Featherstone, Allen M. & Moghnieh, Ghassan A. & Goodwin, Barry K., 1995. "Farm-level nonparametric analysis of cost-minimization and profit-maximization behavior," Agricultural Economics, Blackwell, vol. 13(2), pages 109-117, November.
    19. Banker, Rajiv D & Maindiratta, Ajay, 1988. "Nonparametric Analysis of Technical and Allocative Efficiencies in Production," Econometrica, Econometric Society, vol. 56(6), pages 1315-1332, November.
    20. Zein Kallas & Teresa Serra & José Maria Gil, 2010. "Farmers’ objectives as determinants of organic farming adoption: the case of Catalonian vineyard production," Agricultural Economics, International Association of Agricultural Economists, vol. 41(5), pages 409-423, September.
    21. Krishna P. Pokharel & Allen M. Featherstone, 2019. "Estimating multiproduct and product‐specific scale economies for agricultural cooperatives," Agricultural Economics, International Association of Agricultural Economists, vol. 50(3), pages 279-289, May.
    22. McElroy, Marjorie B, 1987. "Additive General Error Models for Production, Cost, and Derived Demand or Share Systems," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 737-757, August.
    23. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-597, May.
    24. Jean-Paul Chavas & Thomas L. Cox, 1995. "On Nonparametric Supply Response Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 80-92.
    25. Elvira Silva & Spiro Stefanou, 2003. "Nonparametric Dynamic Production Analysis and the Theory of Cost," Journal of Productivity Analysis, Springer, vol. 19(1), pages 5-32, January.
    26. Jean-Paul Chavas & Thomas L. Cox, 1988. "A Nonparametric Analysis of Agricultural Technology," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(2), pages 303-310.
    27. Shon P. Williams & C. Richard Shumway, 1998. "Aggregation of data and profit maximization in Mexican agriculture," Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 235-244, February.
    28. Yacob A. Zereyesus & Allen M. Featherstone, 2017. "Empirical analysis of profit maximization and cost minimization behaviour of Kansas farms," Applied Economics Letters, Taylor & Francis Journals, vol. 24(17), pages 1255-1258, October.
    29. Aydin Basarir & Jeffrey M. Gillespie, 2006. "Multidimensional goals of beef and dairy producers: an inter‐industry comparison," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 103-114, July.
    30. H. Alan Love, 1999. "Conflicts between Theory and Practice in Production Economics," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 696-702.
    31. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Featherstone, Allen M. & Moghnieh, Ghassan A. & Goodwin, Barry K., 1995. "Farm-level nonparametric analysis of cost-minimization and profit-maximization behavior," Agricultural Economics, Blackwell, vol. 13(2), pages 109-117, November.
    2. Loren Tauer & Zdenko Stefanides, 1998. "Success in maximizing profits and reasons for profit deviation on dairy farms," Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 151-156, February.
    3. Bar-Shira, Ziv & Finkelshtain, Israel, 1997. "Nonparametric analysis of pooled production data," Economics Letters, Elsevier, vol. 55(2), pages 173-178, August.
    4. Fare, Rolf & Grosskopf, Shawna, 1995. "Nonparametric tests of regularity, Farrell efficiency, and goodness-of-fit," Journal of Econometrics, Elsevier, vol. 69(2), pages 415-425, October.
    5. Laurens CHERCHYE & Timo KUOSMANEN & Thierry POST, 2001. "Non-Parametric Production Analysis under Alternative Price Conditions," Working Papers of Department of Economics, Leuven ces0105, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    6. Kellie Curry Raper & Corinna Noelke, 2004. "Determining market power exertion between buyers and sellers: are nonparametrics a viable alternative?," Applied Economics, Taylor & Francis Journals, vol. 36(20), pages 2265-2274.
    7. Jean-Paul CHAVAS & Thomas L. COX, 1994. "A Primal-Dual Approach To Nonparametric Productivity Analysis: The Case Of U.S. Agriculture," Staff Papers 372, University of Wisconsin Madison, AAE.
    8. Masato Nakane & Loren Tauer, 2009. "Empirical dairy profits under fluctuating prices," Applied Economics, Taylor & Francis Journals, vol. 41(1), pages 5-15.
    9. Jean‐Paul Chavas & Thomas L. Cox, 1997. "Production Analysis: A Non‐Parametric Time Series Application To Us Agriculture," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1‐3), pages 330-348, January.
    10. Leleu, Hervé, 2013. "Inner and outer approximations of technology: A shadow profit approach," Omega, Elsevier, vol. 41(5), pages 868-871.
    11. Elvira Silva & Spiro Stefanou, 2003. "Nonparametric Dynamic Production Analysis and the Theory of Cost," Journal of Productivity Analysis, Springer, vol. 19(1), pages 5-32, January.
    12. Zereyesus, Yacob Abrehe & Featherstone, Allen M. & Langemeier, Michael R., 2009. "Farm Level Nonparametric Analysis of Profit Maximization Behavior with Measurement Error," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46829, Southern Agricultural Economics Association.
    13. Cherchye, Laurens & Kuosmanen, Timo & Post, Thierry, 2002. "Non-parametric production analysis in non-competitive environments," International Journal of Production Economics, Elsevier, vol. 80(3), pages 279-294, December.
    14. Just, Richard E., 2003. "Risk research in agricultural economics: opportunities and challenges for the next twenty-five years," Agricultural Systems, Elsevier, vol. 75(2-3), pages 123-159.
    15. Cox, Thomas L. & Mullen, John D. & Hu, Wensheng, 1996. "Nonparametric Measures Of The Impacts Of Public Research Expenditures On Australian Broadacre Agriculture: Preliminary Results," Staff Papers 12656, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    16. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, August.
    17. Mike Tsionas & Valentin Zelenyuk, 2021. "Goodness-of-fit in Optimizing Models of Production: A Generalization with a Bayesian Perspective," CEPA Working Papers Series WP182021, School of Economics, University of Queensland, Australia.
    18. Richard V. Llewelyn & Jeffery R. Williams, 1996. "Nonparametric analysis of technical, pure technical, and scale efficiencies for food crop production in East Java, Indonesia," Agricultural Economics, International Association of Agricultural Economists, vol. 15(2), pages 113-126, November.
    19. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2008. "Analyzing Cost-Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology," Operations Research, INFORMS, vol. 56(1), pages 204-221, February.
    20. Walter Briec & Kristiaan Kerstens & Philippe Venden Eeckaut, 2004. "Non-convex Technologies and Cost Functions: Definitions, Duality and Nonparametric Tests of Convexity," Journal of Economics, Springer, vol. 81(2), pages 155-192, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:agecon:v:52:y:2021:i:1:p:37-50. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iaaeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.