Deregulation and productivity: Empirical evidence on dairy production

We investigate productivity development and its relation to resource reallocation effects in the dairy sector in southeast Germany during the phasing-out of the European Union milk quota. We hypothesize that both extreme output price levels and market deregulation fostered efficient reallocation of production resources. We use a farm-level dataset containing financial accounting data for a period of 15 years. Farm-level productivity is estimated by a proxy variable approach that is robust to endogenous input choice. We compare this approach to other estimation techniques as well as an index-based analysis. After aggregation we decompose sector productivity into unweighted mean productivity and a covariance term measuring the allocation of resources toward more productive farms. We observe an increase in the covariance term coinciding with a period of deregulation efforts and volatile milk prices. We seek to find support for our hypotheses by a regression analysis linking the measure for the potential covariance between resource reallocation and productivity on the one hand, and deregulation as well as price variability on the other. In this analysis we find some empirical evidence for the hypotheses.