– This paper aims to develop and utilize a conceptual framework to examine the impact of liquidity and solvency on cost efficiency for a sample of Kansas farms.
– A standard cost-efficiency model is modified to incorporate liquidity and solvency ratios. Tobit regressions are used to determine the impact of farm characteristics on improvements in efficiency.
– Results confirm that liquidity and solvency measures have a significant impact on improving cost efficiency. Farms with larger expenditures on purchased inputs relative to capital were less likely to improve efficiency when liquidity and solvency were considered.
– To the authors' knowledge, the paper is the first to add liquidity and solvency ratios to the cost-efficiency model developed by Färe et al. for the analysis of farms.
