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Elasticity of Substitution and Farm Heterogeneity in TFP and Size: A Theoretical Framework and Empirical Application to Australian Broadacre Farms

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  • Sheng, CP

Abstract

This paper develops a theoretical model to examine the relationship between the input elasticity of (technical) substitution and both farm total factor productivity and size. In the presence of ongoing technical change and its factor bias, the ‘income effect’ arising from farms’ cost minimizing behaviour enables them to increase productivity by saving inputs or, through the dual equivalent, enlarging farm size. As such, farms with higher elasticities of substitution tend to grow larger and become more productive, which provides a new mechanism through which farm heterogeneity in productivity growth can be examined. Empirical evidence from Australian broadacre agriculture supports this theory and points to important policy implications.

Suggested Citation

  • Sheng, CP, 2014. "Elasticity of Substitution and Farm Heterogeneity in TFP and Size: A Theoretical Framework and Empirical Application to Australian Broadacre Farms," 2014 Conference (58th), February 4-7, 2014, Port Macquarie, Australia 165874, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare14:165874
    DOI: 10.22004/ag.econ.165874
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    References listed on IDEAS

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    3. repec:bla:ausecp:v:39:y:2000:i:2:p:245-61 is not listed on IDEAS
    4. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
    5. Krugman, Paul R., 2000. "Technology, trade and factor prices," Journal of International Economics, Elsevier, vol. 50(1), pages 51-71, February.
    6. Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-888, September.
    7. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
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    Cited by:

    1. Lana Awada & Peter W. B. Phillips, 2021. "The distribution of returns from land efficiency improvement in multistage production systems," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(1), pages 73-92, March.
    2. Tim Lefroy & James Key, 2018. "Determinants of Broadacre Farming Efficiency in Western Australia: A Stochastic Frontier Analysis," Economic Papers, The Economic Society of Australia, vol. 37(2), pages 180-196, June.
    3. Li, Kuo & Griffith, Garry & Kingwell, Ross & Malcolm, Bill, 2017. "Measuring the Returns to Investment in Research and Development in the Australian Grains Industry," 2017 Conference (61st), February 7-10, 2017, Brisbane, Australia 258674, Australian Agricultural and Resource Economics Society.

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