Rationalising inefficiency in dairy production: evidence from an over-time approach

We argue that inefficiency can be part of a strategic self-repositioning adjustment process beyond the general interpretation of poor performance. Based on the rational inefficiency hypothesis, we examine the simultaneous dynamics of efficiency and animal welfare improving investments over time in dairy farms. Using rotating panel data from Swedish dairy farms and implementing multidirectional efficiency analysis and Markov transitional dynamic analysis, the paper provides evidence that for some farms inefficiency is temporary and part of rational decision along their trajectory towards multi-efficiency (high efficiency-high animal welfare). The findings show the importance of time dynamics in efficiency achievements with implications to cross-sectional view.