Supply Response in Pakistan with "Endogenous" Technology

Abstract

Considering the significance of agriculture sector in Pakistan's economy, one of the major objectives of agricultural policy has been to raise the level of real income of the farmer by stabilising the agricultural output through a system of price support programme. In the recent past, a number of studies have confirmed that Pakistani farmers respond to changes in output prices.! The prime objective of these studies was to estimate price, acreage or yield elasticities based on the Nerlovian Adjustment Model under alternative expectation schemes. Naqvi and Burney (1992) estimated output supply and input demand functions based on the profit function approach.2 Surprisingly, the single-equation supply model has been used extensively for policy analysis without noticing the fact that such a model does not guarantee that the harvested share of each crop will always be non-negative and the sum of shares of all crops will be unity. Similarly, models which are based on applied duality theory do not take into account the actual decision-making at the farm level. The sequence of events is such that farmer first allocates area across crops and then chooses the input levels conditioned on the allocation of area across crops. Mundlak (1988) has shown that the optimisation model in this case will have to be modified to provide for sequential solution for area allocation and input use. This model clearly distinguishes the changes in optimal input and output combinations for each crop from changes in the quasi-fixed inputs across crops.