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Estimation of Technical Inefficiency in Production Frontier Models Using Cross-Sectional Data

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Abstract

In this paper, we discuss the specification and estimation of technical efficiency in a variety of stochastic frontier production models. The focus is on cross-sectional models. We start from the basic neoclassical production theory and introduce technical inefficiency in there. Various model specifications with several distributional assumptions on the inefficiency component are explored in detail. Theoretical and empirical issues are illustrated with empirical examples using STATA.

*This paper is written with assistance from Alan Horncastle, Oxera Consulting Ltd, Oxford, UK, Alan.Horncastle@oxera.com.

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Notes

  1. 1.

    or at least non-negative.

  2. 2.

    Note that as we have discussed in Sect. 1.5.1, slope coefficients of the OLS estimation are consistent estimates of those of the corresponding stochastic frontier model.

  3. 3.

    Other distributions, such as the Gamma distribution, have also been suggested, but they are not commonly examined in the literature and so are not included in our discussion.

  4. 4.

    On the other hand, if firms are from a regulated industry that has been regulated for a while, one would expect convergence in efficiency to have occurred, thereby meaning that their efficiency levels would be similar though, not necessarily, close to fully efficient. For example, if regulatory incentives are strong, including those for the more efficient companies, convergence should tend toward the frontier (again, suggesting that the half-normal model would be appropriate). While, if incentives are weak for the efficient companies to improve, convergence may occur but at a level below 100 %. In this case the distribution may be more like a truncated normal distribution with positive mean.

  5. 5.

    The same argument can be used to justify exponential distribution. It is worth noting that half-normal and exponential distributions are quite close, and one might expect to see similar estimated efficiency levels from the two models.

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Authors and Affiliations

  1. Department of Economics, State University of New York—Binghamton, Binghamton, NY, 13902, USA

    Subal C. Kumbhakar

  2. Department of Economics, National Taiwan University, Taipei, 10055, Taiwan

    Hung-Jen Wang

Authors
  1. Subal C. Kumbhakar
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  2. Hung-Jen Wang
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Correspondence to Subal C. Kumbhakar .

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Editors and Affiliations

  1. Department of Economics, University of Connecticut, Storrs, USA

    Subhash C. Ray

  2. Department of Economics, State University of New York, Binghamton, New York, USA

    Subal C. Kumbhakar

  3. Department of Economics, University of Delhi, Delhi, India

    Pami Dua

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Kumbhakar, S.C., Wang, HJ. (2015). Estimation of Technical Inefficiency in Production Frontier Models Using Cross-Sectional Data. In: Ray, S., Kumbhakar, S., Dua, P. (eds) Benchmarking for Performance Evaluation. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2253-8_1

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