Re-examining the inverse relationship between farm size and efficiency: The empirical evidence in China

Whether there exists an inverse relationship (IR) between farm size and its efficiency remains a hotly debated question among agricultural economists. In most studies to date, farm efficiency is measured by land productivity. Thus, the IR actually measures the relationship between farm size and land productivity. The purpose of this paper is to examine and understand the IR from a novel angle by using multiple definitions of farm efficiency indicators like labor productivity, profit ratio, total factor productivity (TFP) and technical efficiency (TE).

By using the farm-level panel data from Hubei province in China from 1999 to 2003, this paper employs the two-way fixed effect model of panel data and the stochastic frontier analysis of Battese and Coelli model to investigate the relationship between farm size and its production efficiency derived from the multiple definitions of production efficiency indicators including land productivity, labor productivity, profit ratio, TFP and TE.

The study confirmed the IR between land productivity and farm size, as in many formal studies. However, the relationship between farm size and other agricultural efficiency indicators may be positive, negative or uncorrelated at, depending on how the farm efficiency is defined. Therefore, the paper concluded that the relationship between farm size and its production efficiency is mixed. This paper provides economic explanations for the IR through the comprehensive study using the expansion of agricultural efficiency indicators.

Because different agricultural efficiency indicators have different policy implications for China's future agricultural and land policy, the findings have tremendous policy implications, particularly in terms of the current debate on large or small farm development strategy, the also so-called “go big or small” agricultural strategy. In this sense, the Chinese household responsibility system has played a critical role in its agriculture and will continue to play a critical role in terms of social security and social equality. Any reform to this system should proceed with caution.

While most existing studies only try to explain the IR from the perspective of land productivity, this paper attempts to propose a novel angle to examine the IR by using multiple definitions of agricultural efficiency and hopes to find some new conclusions.