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Abstract

This paper tests the hypotheses that grain self-sufficiency policies and fiscal decentralization result in inefficiency in grain production in China. Households supply grain in order to comply with self-sufficiency policies rather than to maximize profits. This raises the possibility that grain production is inefficient - especially where the opportunity costs are high (Turner, Brandt, and Rozelle). In addition, fiscal decentralization results in inefficiency in low-income provinces where the small A multiple output distance function is used to derive expressions for a stochastic production frontier and economic inefficiency. Provincial level data for grain and rural industrial output are used in the analysis and local fiscal expenditures and revenues are used as explanators of inefficiency. The expressions are estimated simultaneously using maximum likelihood techniques. The findings suggest that grain production in China could be made more efficient by: 1.) policies that encourage production according to comparative advantage rather than grain self-sufficiency and, 2.) fiscal reforms that increase the responsibility of the central government for agricultural investment.

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