Accounting for animal health in efficiency analysis: An application to Swedish dairy farms

Abstract Poor animal health is a central concern in modern livestock production. Despite the necessity to incorporate animal health in efficiency analysis, the theoretical and empirical developments are limited on this subject. This article appropriately characterizes the axiomatic properties of animal health within a production framework. We treat animal health as a weakly disposable output with characteristics of an input and an output, which permits computing animal health‐adjusted efficiency measures and shadow prices of animal health. The application considers 980 observations of Swedish dairy farms over the years 2009–2016. We use a Benefit‐of‐the‐Doubt approach for assessing animal health, which captures its multiple dimensions with weights being optimized for each farmer. Applying a random sample‐split procedure within a Data Envelopment Analysis framework, we statistically verify the extent to which inclusion of animal health in the production framework changes the efficiency estimates. The results show that including animal health in production analysis increases the average efficiency estimates from 0.900 to 0.973, a finding that largely also holds in a statistical sense. The shadow prices of animal health are mostly positive, which indicates a general willingness to accept lower levels of production for higher levels of animal health. Our findings suggest the importance of incorporating animal health into efficiency analysis.