Supply Response in Pakistan with "Endogenous" Technology

Considering the significance of agriculture sector inPakistan's economy, one of the major objectives of agricultural policyhas been to raise the level of real income of the farmer by stabilisingthe agricultural output through a system of price support programme. Inthe recent past, a number of studies have confirmed that Pakistanifarmers respond to changes in output prices.! The prime objective ofthese studies was to estimate price, acreage or yield elasticities basedon the Nerlovian Adjustment Model under alternative expectation schemes.Naqvi and Burney (1992) estimated output supply and input demandfunctions based on the profit function approach.2 Surprisingly, thesingle-equation supply model has been used extensively for policyanalysis without noticing the fact that such a model does not guaranteethat the harvested share of each crop will always be non-negative andthe sum of shares of all crops will be unity. Similarly, models whichare based on applied duality theory do not take into account the actualdecision-making at the farm level. The sequence of events is such thatfarmer first allocates area across crops and then chooses the inputlevels conditioned on the allocation of area across crops. Mundlak(1988) has shown that the optimisation model in this case will have tobe modified to provide for sequential solution for area allocation andinput use. This model clearly distinguishes the changes in optimal inputand output combinations for each crop from changes in the quasi-fixedinputs across crops.