Technical Efficiency In the present study, the efficiency of marigold production under contract farming was determined using

the stochastic frontier production function. Stochastic Frontier The key factor of the stochastic production frontier is that the disturbance term is composed of two parts. One is symmetric and the other one sided. The symmetric component captures the random effects outside the control of the decision maker including the stochastical noise contained in every empirical relationship (such as poor input performance, bad weather, input supply breakdown, etc.,) and the one sided component that captures deviations from the frontier due to inefficiency. The following equation denotes the production frontier in the matrix form; Qi = Q (Xki,F) eI ---------------Where, Qi ; Output of the i th farm Xki ; Vector of K inputs of the i th farm F ; Vector of parameters to be estimated and i ; Farm specific error term. The stochastic frontier is called a composed model because the error term is composed of two independent elements, namely i = Vi Ui i = 1, 2.n (1) i = 1, 2..n k = 1, 2k

The term Vi is the symmetric component that permits random variations in output due to factors like weather and plant diseases. It is assumed to be identically and independently distributed as Vi N (0,
2 v).

A one sided component (Ui > 0) reflects technical efficiency relative

to the stochastic frontier Qi = Q (Xki,F)evi. Thus, Ui = 0 for any farm lying on the frontier, while Ui > 0 for any farm lying below the frontier. Hence, expression Ui represents the amount by which the frontier exceeds realized output. Assuming that Ui identically and independently of U is halfnormal, this Ui takes the value zero when the farm produces on its outer-bounded production function (realizing all the technical efficiency potential) and is less than zero when the farm

produces below its outer-bounded production function (not realizing fully its technical efficiency potential). This might happen due to number of factors such as; risk aversion, self-satisfaction, information problems, etc., which may prevent the farm from achieving its full potential. The Density function can be written as,

fu(ui) =
=0,

1 ui2 ------ exp ( -1/2 -----) if Ui>0 2 u 1/2 u otherwise

2

It follows that: Further defining term.

= V (E =

)=

V +

u/ v

(i.e.) ratio of one sided error term to symmetric error

The Cobb-Douglas functional form is generally preferred for assessing technical efficiency because of its well-known advantages. Its purpose is to show what output of a given product will be achieved by efficient combination of factors. In principle, confining the analysis to this functional form can be sometime restrictive. However, it is possible to estimate the stochastic frontier using Maximum Likelihood Estimation Method. Aigner et al (1977) suggested that Maximum Likelihood Estimates (MLE) of the parameters of model could be obtained in terms of parameterization.

=
v/

2 v u

2 u

One advantage of estimating the frontier function is that it is possible to find out whether the deviation of yield from frontier yield is mainly because of not using best practice techniques by the farmers or is due to external random factors. Thus, one can say whether the differences between actual yield obtained and frontier yield, if any, has occurred accidentally or not.
2

= K=

2 v

+
2 v

2 u and

2 u

K is an indicator of relative variability of Ui and Vi that differentiates the actual yield from the frontier. There are two interesting points of the above K Where
2 v

is tending to zero, which implies that Ui is the pre-dominant error, then K = 1.

This means that farmers yield difference from the increasing feasible yield is mainly because he did not use best practice or technique. When
u 2

is tending to zero, which implies that the symmetric error term, Vi is the

predominant error and K will be tending to zero. This means that the farmers yield differences from the frontier yield is mainly because of either statistical error or external factors not included under Method is this used to model. estimate the Maximum farm technical Likelihood efficiency (as Method used by may obtain direct estimates of stochastic production frontier model. In the present study, MLE Olsen et al. (1980), Aigner (1997), Kutaula (1993) and Arindam Banik (1994). In the present study, the following assumptions were made while specifying a stochastic frontier. The frontier is stochastic in nature due to factors beyond human control and symmetrically distributed error term is present. It is responsible to capture the effects of outside random effects observed and measurement error on the dependent variable and other statistical noise. Variations in the technical efficiency of individual farms are due to factors completely under the control of farmers. The model for the present study specified as follows:

ln Y = ln a + ln X8 + Y= X1 = X2 = X3 = X4 = X5 = X6 = X7 = X8 = X9 = U =
9

ln X1 +

2 ln

X2 +

ln X3 +

ln X4 +

ln X5 +

ln X6 +

ln X7 +

ln X9 + U

Yield of marigold (quintals /ha.) Farm yard manure (tonnes/ha) Quantity of Nitrogenous fertilizer (kg./ha.) Quantity of Phosphorus fertilizer (kg./ha) Quantity of Potassium fertilizer (kg./ha) Seed (grams/ha) Expenditure on plant protection chemicals (Rs/ha) Machine power (tractor hours/ha) No. of irrigation Human labour (man days/ha) Error term

Resource Use Efficiency: Data Envelopment Analysis (DEA) DEA is a multi-factor productivity analysis model for measuring the relative efficiencies of a homogenous set of decision-making units (DMUs). It is the non- parametric mathematical programming approach, which provides a greater advantage over the frontier production approach on several counts. Firstly, it allows data to behave itself and provides technical efficiency for each firm readily. Secondly, it details out the extent of overuse of inputs in relation to output among different firms. The DEAP, a data envelopment analysis (computer) program version 2.1 has been used for the analysis. Before describing DEA method, input-oriented efficiency measures are discussed, which are used in the present study. Farrell (1957) used a two-input and single-output constant returnsto-scale example to demonstrate his ideas. In Figure 4.2, two inputs, X1 and X2, are represented on the horizontal and vertical axes, respectively. SS is an isoquant representing various combinations of inputs (X1 and X2) used to produce a certain quantity of output (Y). All points on this isoquant reflect technically efficient
/

production. An effort is made to measure the efficiency of a particular firm, which is operating at a point P with production level Y, which can be produced along the isoquant, SS . To define the technical efficiency of the observed firm, a line is drawn from the origin to the point P. This line crosses the isoquant at the point Q. In the case of a technically efficient firm, the same amount of output (Y) is produced using inputs (X1 and X2) defined by the point Q. Inputs are not used efficiently by observed firm P. So the technical efficiency of the observed firm is defined as the ratio of the distance from the point Q to the origin, over the distance of the point P from the origin: TE = OQ/OP . (1)
/

If the input prices are available, allocative efficiency could also be defined. An isocost line, AA, is drawn tangent to the isoquant SS, at the point Q, which intersects the line OP at the point R. For the output quantity produced at the point Q, the best use of inputs is at the point R because it incurs the minimum cost. Therefore, the point Q is not an optimal point because the distance, RQ (cost), can be reduced without any reduction in output. Allocative efficiency is defined as the ratio of the distance of the point R to the origin over the distance of the point Q from the origin: AE = OR/OQ . (2)

Figure 4.2 Technical and allocative efficiency in input-oriented measures

Economic efficiency is the product of technical efficiency and allocative efficiency:

EE = (OQ/OP) v (OR/OQ) = OR/OP been estimated using DEA approach. 4.4.4.1 Technical Efficiency

. (3) non-insured has

In the present study technical efficiency of resource use for insured and

Suppose data are available on K inputs and M outputs in each of N firms or Decision Making Units (DMUs). Input and output vectors are represented by the vectors, xit and yit, respectively, for the ith firm in tth time period. The data for all firms may be denoted by the Kv NT input matrix, X and the M v NT output matrix, Y. The purpose of DEA is to construct a non parametric envelopment frontier over the data points such that all observed points lie on or below the production frontier. The best way to introduce DEA is via the ratio form. For each DMU, we would like to obtain a measure of the ratio of all outputs over all inputs, such as udyi /vdxi, where u is an Mv1 vector of output weights and v is a Kv1 vector of input weights. To select the optimal weights, we specify the mathematical programming problem: maxu,v ( udyi /vdxi), st udyi/vdxi e 1, j= 1,2,,N u,v u 0 . (4)

This involves finding values for u and v, such that the efficiency measure of the i-th DMU is maximized, subject to the constraint that all efficiency measures must be less than or equal to one. One problem with this particular ratio formulation is that it has an infinite number of solutions. To avoid this one can impose the constraint vdxi =1, which provides: maxQ,v ( Qdyi ), st vdxi=1 Qdyj- vdxj e 0, j= 1,2,,N Q, v u 0, . (5)

Where the notation change from u and v to Q and v reflects the transformation. This form is known as the multiplier form of the linear programming problem. Using the duality in linear programming, one can derive an equivalent envelopment form of this problem: minU,P U ,

st

- yi+YP u 0, U xi-XP u 0, P u 0, . (6)

Where U is a scalar and P is a Nv1 vector of constants. This envelopment form involves fewer constraints than the multiplier form (K+M< N+1), and hence is generally the preferred form to solve. The value of U obtained will be the efficiency score for i-th DMU. It will satisfy U e 1, with a value of 1 indicating a point on the frontier and hence a technically efficient DMU, according to Farrell (1957) definition. Note that the linear programming must be solved N times, once for each DMU in the sample. A value of U is obtained for each DMU.