DEBT AND INPUT MISALLOCATION OF AGRICULTURAL SUPPLY AND MARKETING COOPERATIVES

Kim and Maksimovic provide an empirical model to examine the effect of debt on a firm. Their model is adapted to examine agricultural supply and marketing cooperatives. Using a short-run variable cost function, we find firm efficiency decreases as debt increases. A US$1 increase in indebtedness increases total short-run variable costs by US$0.0167 or roughly 1.67%. Debt tends to shift input usage away from labour inputs. A test developed by Conrad and Unger is applied to determine whether the agricultural supply and marketing cooperatives are at long-run equilibrium capacity. It is found that most of the cooperatives were overinvested in capacity. However, debt does not explain this overinvestment. Finally, the effect of debt on total productivity over the study period is examined. It is found that debt has had a small positive impact on total factor productivity growth. Scale economies and non-optimal capacity had large impacts on total factor productivity. Although debt is associated with short-run misallocation of resources, we find little evidence that debt is associated with long-run suboptimal capacity.