Access to credit and determinants of technical inefficiency of specialized smallholder farmers in Chile

Access to credit and credit constraint are critical determinants of competitiveness in agriculture; they have an impact on the technical efficiency of farms. The objective of this study was to analyze how credit variables influence the technical efficiency of two groups of specialized smallholder farmers in Chile. The translog stochastic production frontier model was used to predict the level of farm technical efficiency by the maximum likelihood method. Based on 2004 data, production functions and technical inefficiency score were estimated for 109 livestock and 342 crop producers. Results showed that the mean technical efficiency was 89% and 78% for crop and livestock producers, respectively. Technical efficiency increased with the decreasing use of inputs, dependence on on-farm income, farmer education, family size, and age of the head of household. Credit volume had a significant impact by increasing and decreasing efficiency in crop and livestock production, respectively. Correspondingly, credit-constrained farmers were less efficient in crop production and more efficient in livestock production. For livestock producers, credit volume and credit constraints were found to be endogenous to technical efficiency. A possible explanation is the organization of public support for small livestock producers in Chile, which provides lenders with information about individual livestock producers. Correcting for this endogeneity did not lead to qualitatively different results, but it did influence point estimates of parameters in the production function and inefficiency models, suggesting that it is important to test for endogeneity in the variables used to model inefficiency effects.

Keywords
Credit; credit constrained; endogeneity; small farmer; stochastic frontier; technical inefficiency