Managerial ability, albeit an illusive concept, is related to analysis of size economies in South Africa's dairy production sector. Data from the 1997 production cost survey of 394 farms was used in econometric estimation of long run average cost (LAC) functions for different levels of (a proxy of) managerial ability. Results show that the LAC curves are U-shaped with greater economies than diseconomies of size. Also, better managers are shown to profitably produce any level of output at lower average cost per litre than other managers. In addition their optimum levels of output are between two and four times as large as firms with average or low levels of management. The better-managed enterprises are on average operating below their optimum levels, but low and average managed firms are producing output well in excess of their optima. Thus the hypothesized vertical and horizontal displacement of the LAC curve holds in the case of the South African dairy sector, as represented by the data set.


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