Earning capacity, efficiency and poverty: A study on rural West Bengal and Orissa

Abstract

‘Potential earning’, a concept derived from human capital theory, can be interpreted as ‘income frontier’. Given endowments (resources), the deviation of actual earning from the frontier gives a measure of ‘deficiency in utilization of resources’ (inefficiency). We estimate household level earning frontier functions for two eastern states of rural India, namely, West Bengal and Orissa using the nonparametric DEA method and examine the relationships among level of living, occupational status and efficiency obtained from the DEA analysis. We also examine the influence of social opportunities on frontier income and interpret the results in terms of policy implications.