Diseconomies of Size with Fixed Managerial Ability

Managerial ability has important implications for farm growth. In this article we first show in a production model that increasing output with a fixed level of managerial ability can lead to a decrease in profits. Next, we discuss the effect that managerial ability has on economies of size. In the empirical part, economies of size are estimated for a sample of dairy farms using a proxy for managerial ability, which is calculated as a technical efficiency index. The results show that increasing farm size while holding managerial ability constant can be an important source of diseconomies of size.