In this article we assess the effect of market imperfections and income inequality on rural production efficiency. The analysis is carried out using the notion of stochastic conditional efficiency computed in terms of free disposal hull (FDH) efficiencymeasurements. Free disposal hull and conditional FDH are output oriented with variable returns to scale. They are evaluated for rural production at the county level, considering the rank of rural gross income as the output and the ranks of land expenses, labor expenses, and expenses on other technological factors as inputs. The conditional frontier is dependent on income inequality and other indicators related to market imperfections. The econometric approach is based on fractional regression models and the generalized method of moments (GMM). Overall, the market imperfection variables act to reduce performance, and income dispersion is positively associated with technical efficiency.
Keywords: conditional FDH, GMM, fractional regression, rural income inequality.