An econometric analysis of duality based models of Australian broadacre production

2017-01-31T04:12:19Z (GMT) by Nguyen, Duong Thi Mai
The first key objective of this thesis is to estimate a set of econometric models of Australian broadacre agricultural production by applying the duality theory in production economics. Models of Australian broadacre agriculture are estimated using alternative formulations of econometric modelling of producer decision-making, in which cost minimisation, revenue maximisation and profit maximisation are assumed. A unique, large quasi-micro pooled cross-sectional farm dataset drawn from the Australian Agricultural and Grazing Industries Survey over a sixteen year period, from 1990 to 2005, is used for model estimation. Key policy-relevant outcomes of this investigation are estimates of price elasticities and elasticities of transformation and substitution between broadacre inputs and outputs in Australia. Multi-product dual cost, revenue and profit functions are specified for Australian broadacre agriculture. The multi-product functions are specified to accommodate the prevalent multi-enterprise operation on Australian broadacre farms. The restricted versions of the dual functions are chosen to account for quasi-fixity and the lumpiness of some capital used in broadacre production. The translog and normalised quadratic, the two most popular flexible functional forms in empirical duality applications, are used to specify the dual functions. In addition, impacts of climatic conditions, production focuses, production scales and rainfall on production are also allowed for in the estimated models. Systems of demand and/or supply equations are derived from the specified dual cost, revenue and profit functions and estimated using the quasi-micro dataset available. The estimated systems obtained have reasonable statistical goodness-of-fit with high percentage of statistically significant system coefficients. Price variables are also found to significantly influence input demand and output supply. Importantly, using the normalised quadratic form, the estimated system of input demand derived from the cost function and the estimated system of output supply derived from revenue functions satisfy the theoretical curvature conditions implied by rational economic behaviour. The estimated supply and demand system derived from the profit function violates the curvature condition but the violation is not severe. Input demand and output supply in broadacre farming are found to be fairly inelastic with respect to price changes in the short run. However, demand for fertilisers and crop and pasture chemicals are found to be sensitive to changes in their own prices and in general production costs. The second key objective of this thesis is to investigate three significant issues concerning the application of the duality theory in empirical agricultural production research using data from Australian broadacre agriculture. First, the results obtained from the dual cost, revenue and profit functions are contrasted according to goodness-of-fit, the satisfaction of theoretical regularity conditions and the sensibility of the generated elasticity estimates. The estimation result obtained under the cost minimisation assumption conforms more to economic theory than results obtained under revenue maximisation or profit maximisation. Second, the estimation results are more in line with expectations based on prior economic reasoning when the normalised quadratic functional form is used than when the translog is used. Third, results using data of Australian broadacre farming at two aggregate levels indicate that data aggregation across firms can have a significant impact on research findings, depending on the assumption made regarding the economic behaviour of producers