Estimation of Input Distance Functions: A System Approach

Abstract

This article offers a methodology to address the endogeneity of inputs in the input distance function (IDF) formulation of the production processes. We propose to tackle endogenous input ratios appearing in the normalized IDF by considering a flexible (simultaneous) system of the IDF and the first-order conditions from the firm's cost minimization problem. Our model can accommodate both technical and (input) allocative inefficiencies amongst firms. We also present the algorithm for quantifying the cost of allocative inefficiency. We showcase our costsystem-based model by applying it to study the production of Norwegian dairy farms during the 1991-2008 period. Among other things, we find both an economically and statistically significant improvement in the levels of technical efficiency among dairy farms associated with the 1997 quota scheme change, which a more conventional single-equation stochastic frontier model appears to be unable to detect.

Decent rural employment and farm production efficiency: empirical evidence from Tanzania and Ethiopia

“…The issue of endogeneity of the output (or the output ratio) seems unsettled and remains a point of active research (Brümmer et al. ; Kumbhakar, ; Tsionas et al., ).…”

“…Second, some inputs in the right‐hand side of the estimation (Eq. ) might be endogenous (Kumbhakar, ; Kutlu, ; Shee and Stefanou, ; Tsionas et al., ). Land is owned by the state in both countries, and farmers are less likely to adjust farm land to productivity shocks.…”

Efficiency of public education in a multiproduct context : the case of colombian municipalities

“…In a multiproduct context, the SFA can be conducted by the application of a "distance function" (see Kumbhakar & Lovell, 2000;Coelli & Perelmann, 2000). However, it has recently been stated that the multiproduct approach leads to a system of parameters that cannot be fully identified (Kumbhakar, 2013;Tsionas, Kumbhakar & Malikov, 2015). For this reason, the solution of the system is endogenous, and alternative procedures to estimate the parameters have to be considered.…”

Economic Evaluation of Yield-Increasing Wheat Seeds Using a Distance Function Approach

“…DFs constitute an established methodology to examine various agricultural production patterns. Studies including Brümmer, Glauben, and Thijssen (2002), Key and Sneeringer (2014), Newman and Matthews (2006), Reinhard, Lovell, and Thijssen (1999), Tsionas, Kumbhakar, and Malikov (2015), and Sauer and Latacz-Lohmann (2015) applied this methodology to analyze the European and American dairy farming sectors with respect to aspects such as technical efficiency and technical change. Other extant studies, such as Coelli and Fleming (2004), Fleming and Lien (2009), Paul and Nehring (2005), and Rahman (2009), studied farms’ diversification strategies.…”