Farm and non-farm labor decisions and household efficiency

This paper develops a theoretical framework for modeling farm households’ joint production and consumption decisions in the presence of technical inefficiency. Following Lopez (1984), a household model where farmers display different preferences between on-farm and off-farm labor is adopted while their production activity can be subject to technical inefficiency. The presence of technical inefficiency does not only lead to the inability of farmers to achieve maximal output but it will also affect the consumption allocation and the household’s labor supply decisions through its effect on both income and on the shadow price of on-farm labor, leading to overall household inefficiency. An application to a panel dataset of 296 farms in the UK illustrates the basic concepts introduced in the theoretical model. The results show that households in our sample are technically inefficient but their efficiency scores are very close. However there is a big dispersion in the household efficiency scores and some households can adapt better their consumption and labor supply decisions when production is technically inefficient.