Regional Diversity of Technical Efficiency in Agriculture as a Results of an Overinvestment: A Case Study from Poland

Abstract

Ensuring adequate profitability of production, which can be ensured by optimal investments, can encourage farmers to be more caring about sustainable development. Several existing studies indicate that technical efficiency in agriculture varies regionally. Investments comprise a basic way to increase efficiency and thus reduce polarisation between regions. However, contrary to established assumptions, not every investment leads to increased efficiency, which entails a phenomenon of overinvestment. Investments should, by definition, be positively correlated with efficiency. However, existing studies indicate the existence of a significant problem of overinvestment, where increased efficiency may not occur. While for about 40% of farms in Poland the scale of investments can be assessed as optimal, more than quarter of farms exhibited absolute overinvestment and nearly one in five farms is underinvested. In response to this problem, this study aimed to identify regional differences in Poland with regard to overinvestment in farms, as well as to determine changes in farm efficiency depending on the region and level of overinvestment. The source material used in the following article consisted of unpublished Farm Accountancy Data Network (FADN) microdata derived from the DG AGRI of the European Commission. The study covered the period 2004–2015. For an original classification of farms according to their level of overinvestment the technical efficiency, using the stochastic frontier analysis approach, was used for determining regional differences that occurred as a result of overinvestment. Stochastic frontier analysis shown noticeable differences in the average technical efficiency for different overinvestment groups. As expected, underinvested farms are the least efficient (general in Poland and in all analyzed regions) and average technical efficiency did not increase. Interestingly, optimally investing farms do not have the highest technical efficiency. Higher efficiency was achieved by both relatively and absolutely overinvested farms. This is due to the fact that in order to produce efficiently in agriculture, it is necessary to at least maintain the level of tangible assets provision, and preferably to increase it as well. In terms of overinvestment levels, farm structure does not differ significantly between individual regions in Poland. However, there are differences between regions in terms of farm efficiency within each group. In all regions, only the underinvested farms did not increase their efficiency over the period under review and the highest efficiency growth rate was in regions where farms were least efficient at baseline.