havioral models of the LG in the transition economy, we will attempt to identify the LG
influence via the TVE’s and PE’s observed production behavior. In the empirical section we
conduct an exercise that assumes the observed employment and output levels of TVEs and
PEs are levels induced by LGs. Likewise, the observed expenditure constraint is assumed to
be consistent with LG efforts and institutional factors.
3 Methodology
To investigate how these factors such as access to credit, technology adoption, input al-
location efficiencies, and forced inefficient output/labor decisions influence TVEs and PEs
profit-maximizing behavior, we need an empirical method which could include all these fac-
tors into the profit maximization model.
Following the work by Shepard on indirect production theory, Chambers (1982) developed
an analytical framework to use in analyzing optimization problems in the face of expendi-
ture constraints. Lee and Chambers (1986) developed a theory of short-run expenditure
constrained profit maximization and econometrically tested it using US agricultural data.
Later, Fare, Grosskopf and Lee (1990), or FGL, developed a nonparametric alternative to
the Lee and Chambers model for testing expenditure constraints. They applied this model
to a sample of California rice farms. Arnade and Gopinath (2000), or AG, extended the FGL
approach to test for the presence of expenditure constraints and output-target constraints as
sources of inefficiency, and examined economic performance in 73 Russian crop production
regions.
As outlined in FGL and AG, this model consists of a series of linear programming prob-
lems. Similar to the nonparametric efficiency measures to which they are related, this linear
programming approach produce individual measures of performance too and therefore al-
lows us to identify whether an individual enterprise faces expenditure constraints, revenue
10
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