Price floors and technical inefficiency in India's sugar processing industry

In India, cane is processed into sugar by cooperatives, public enterprises, and private (for-profit) firms. The Indian government sets a unique floor price for each processor that is increasing in the firm's effectiveness in converting cane into sugar. The floor price binds for public and private firms but not for cooperatives, which rebate profits to members. We argue that this price floor policy creates a disincentive for private and public firms to be technically efficient in converting cane to sugar. In support of this hypothesis an analysis of 593 Indian sugar factories from 1992 to 2007 reveals statistically significant differences in technical efficiency, with cooperatives being the most efficient and public firms least efficient. We estimate welfare losses due to the technical inefficiency attributable to the price-floor policy and argue that it can be eliminated by enacting policy to base price floors upon quality of the cane input received by a factory.