Market imperfections and output loss in the presence of expenditure constraint: A generalized shadow price approach

In view of widespread capital market imperfections and farmers' budget constraints in developing countries, an indirect production function (IPF) is used for a study of 289 Indian paddy growers. The analysis generalizes the IPF to accommodate the numerous kinds of market imperfections and policy-induced distortions that pervade less developed countries' agriculture. The presence of these distortions in an expenditure-constrained situation results in a loss of output, defined as the difference between maximal potential output and actual output. For the sample of farmers, average output loss is found to be in the range of 12%.