The relationship between technical efficiency and size might be affected by farm heterogeneity. We analyse this relationship conditional on a set of control variables. These control variables are chosen using a production model where technical efficiency is introduced as a parameter. As a result, technical efficiency affects both the input demand and the output supply of a profit maximising producer. The empirical application explores these issues using panel data of dairy farms in Spain.
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Álvarez et al. (2004) studied this question.
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