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Abstract
When different technologies are present in an industry, assuming a homogeneous technology
will lead to misleading implications about technical change and inefficient policy
recommendations. In this paper a latent class modelling approach and flexible estimation of
the production structure is used to distinguish different technologies for a representative
sample of E.U. dairy producers, as an industry exhibiting significant structural changes and
differences in production systems in the past decades. The model uses a transformation
function to recognize multiple outputs; separate technological classes based on multiple
characteristics, a flexible generalized linear functional form, a variety of inputs, and random
effects to capture firm heterogeneity; and measures of first- and second-order elasticities to
represent technical change and biases. We find that if multiple production frontiers are
embodied in the data, different firms exhibit different output or input intensities and changes
associated with different production systems that are veiled by overall (average) measures. In
particular, we find that farms that are larger and more capital intensive experience greater
productivity, technical progress and labor savings, and enjoy scale economies that have
increased over time.