Examining the economic performance of Chinese farms: A dynamic efficiency and adjustment cost approach

To understand the state of adjustment processes and the dynamic structure in Chinese agriculture, this paper proposes a dynamic frontier-based model using the shadow cost approach. For this purpose, a dynamic duality model framework of inter-temporal decision making is used. Using a panel data set of 4,201 Chinese farms from three provinces (i.e. Zhejiang, Hubei and Yunnan) from 2003 to 2006, this is the first study to investigate the allocative and technical efficiencies of Chinese agriculture using a dynamic shadow cost approach. The findings show that the adjustment of quasi-fixed inputs is rather sluggish, implying that adjustment costs are considerably high on Chinese farms. The relatively low levels of allocative and technical efficiencies indicate that most farms are unable to catch up with the production frontier under the existing production technology. They are also unable to use various inputs in the appropriate proportion given their respective prices.