Technical efficiency and farmland expansion: Evidence from oil palm smallholders in Indonesia

Abstract

This study asks whether innovation in smallholder production reduces or accelerates land expansion. Even though innovation in agriculture has reduced land expansion globally, rebound effects can occur locally and often at the expense of vital ecosystem functions. In contrast to other studies that investigate rebound effects in response to technological innovation, our study focuses on technical efficiency, the remaining component of total factor productivity. We use a short panel dataset from smallholder oil palm farmers in Sumatra, Indonesia, and develop a two-stage approach in which we estimate technical efficiency and determine its land expansion effect. Our findings suggest that technical efficiency and in particular land efficiency are low, indicating that 50% of the currently cultivated land could be spared. However, the land-sparing effect of increasing technical efficiency is at risk of being offset by about half due to a rebound effect. To maximize the conservation potential from increasing smallholder efficiency, policies need to simultaneously incentivize well-functioning land markets and stricter protection measures for land with high ecological value to mitigate local rebound effects.