Joint estimation of technology choice and technical efficiency: an application to organic and conventional dairy farming

This paper proposes an econometric framework for joint estimation of technology and technology choice/adoption decision. The procedure takes into account the endogeneity of technology choice, which is likely to depend on inefficiency. Similarly, output from each technology depends on inefficiency. The effect of the dual role of inefficiency is estimated using a single-step maximum likelihood method. The proposed model is applied to a sample of conventional and organic dairy farms in Finland. The main findings are: the conventional technology is more productive, ceteris paribus; organic farms are, on average, less efficient technically than conventional farms; both efficiency and subsidy are found to be driving forces behind adoption of organic technology.