Differences in farm efficiency in market and transition economies: empirical evidence from West and East Germany

The efficiency of East German and West German farms is compared for 1995-1997. Non-parametric frontier analysis is used to decompose efficiency differences into technical and scale effects. The results suggest that eastern farms have the potential to attain the same technical efficiency level as western farms. Nevertheless, western farms on average are more productive than their eastern counterparts, which have lower mean scale efficiency and a higher variance of scale efficiency. Therefore, the crucial issue is less a question of optimal production types or optimal ownership types, but more a question of well-functioning factor markets to facilitate adjustments that improve scale efficiency.