Stochastic Efficiency Measurement: The Curse of Theoretical Consistency

Abstract

The availability of efficiency estimation software -freely distributed via the internet and relatively easy to use -recently inflated the number of corresponding applications. The resulting efficiency estimates are used without a critical assessment with respect to the literature on theoretical consistency, flexibility and the choice of the appropriate functional form. The robustness of policy suggestions based on inferences from efficiency measures nevertheless crucially depends on theoretically well-founded estimates. This paper adresses stochastic efficiency measurement by critically reviewing the theoretical consistency of recently published technical efficiency estimates. The results confirm the need for a posteriori checking the regularity of the estimated frontier by the researcher and, if necessary, the a priori imposition of the theoretical requirements. JEL classification codes: C51, D24, Q12

Technical Efficiency among Peasant Farmers Participating in Natural Resource Management Programmes in Central America

“…Furthermore, in order to qualify as a well‐behaved model, the ISDF needs to be non‐decreasing in inputs and decreasing in outputs (Färe et al. , 1994; Sauer et al. , 2006).…”

Production Efficiency of Jasmine Rice Producers in Northern and North‐eastern Thailand

“…positive marginal products, with respect to all inputs and thus non‐negative production elasticities; and (ii) diminishing marginal productivity with respect to all inputs (i.e. the marginal products, apart from being positive should be decreasing in inputs) (Sauer et al. , 2006).…”

Impact of land fragmentation, farm size, land ownership and crop diversity on profit and efficiency of irrigated farms in India

“…As the calculated value using the likelihood-ratio test is higher than the tabulated value, this hypothesis is rejected for all the four models at a 1% level of significance, implying that there are significant technical inefficiency effects in farm profit (Table 3). Sauer et al (2006) suggested to check for two different regularity conditions in the frontier model. These are: (a) monotonicity, i.e.…”

“…While estimating stochastic frontiers, it is important to check theoretical consistency, flexibility, and choice of the appropriate functional form (Sauer et al, 2006). Hereby, an alternative to the widely used Cobb-Douglas production function is the translog production function.…”