A shadow-price frontier measurement of profit efficiency in Chinese agriculture

A shadow-price profit frontier model is developed to examine production efficiency of Chinese farm households. The model incorporates price distortions but retains the advantages of stochastic frontier properties. The shadow prices and shadow profit are derived through a behavioral profit function. Empirical results using household survey data show that the conventional assumption of profit maximization based on market prices is inappropriate. Farmers' resource endowment and education influence their allocative efficiency. Family size, per capita net income, and family members operating as village leaders are positively related to households' production efficiency. Reducing market distortions should increase Farm households' production efficiency.