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Production Frontier and Panel Data
Journal of Business & Economic Statistics
... This model considers both random noise and technical inefficiencies as sources of variability in the production or cost process. This model was further developed in successive works (Colombi et al., 2014;Cornwell et al., 1990;Pitt & Lee, 1981;Schmidt & Sickles, 1984) through the incorporation amongst others of panel data and time-varying technical inefficiencies. Technical efficiency measures estimated with these models are often influenced by various factors, such as model specification, assumptions made regarding the distribution of errors, and the temporal behavior of inefficiency. ...
... The use of panel data offers certain advantages in this regard. If inefficiency remains constant over time, it is possible to estimate it consistently without relying on distributional assumptions, as demonstrated by Schmidt and Sickles (1984) through their development of the Fixed Effect Model (FEM). However, the assumption of time-invariant inefficiency is quite strong. ...
... In these models, any persistent inefficiency is completely absorbed in the individual-specific constant term. Dropping both i and u it leads to older time invariant inefficiency models (REM) of Pitt and Lee (1981), and Schmidt and Sickles (1984). Dropping both i and i leads to time-variant inefficiency models of Battese and Coelli (1992), Cornwell et al. (1990). ...
To assess the impact on pharmaceutical wholesalers’ financial viability and efficiency of the reform of the wholesalers’ and pharmacies’ margins on reimbursable drugs enacted in 2010 that halved the distributors’ margins. We perform a stochastic frontier analysis on a large original dataset comprising financial and production data from 2009, a year prior to the reform, to 2019 gathered in order to assess the impact of the reform on firms’ profitability and efficiency. The implemented policies have not been successful in fostering the development of a more efficient market that would ultimately benefit social welfare. Overall, our findings indicate that bigger firms lag behind their smaller counterparts in terms of efficiency, even in the long run. Our findings also suggest that an efficient pharmaceutical wholesaler is currently unable to generate normal profit from the distribution of reimbursable drugs. Compared to the other European countries, that seem to have a cost oriented approach, Italy provides one of the lowest margins to pharmaceutical wholesalers without properly considering the costs of the drugs’ distribution. A new regulatory approach to wholesaling margins is needed in order to improve efficiency and welfare.
... However, the presence of technical inefficiency is a general phenomenon of the production behaviour; thereby, deterministic frontier hardly makes any sense in the real world. To measure TE, the intellectual history of SFA includes the models of Aigner et al. (1977), Meeusen and van den Broeck (1977), Stevenson (1980) and Greene (2003) in the cross-sectional data analysis, Pitt and Lee (1981) and Schmidt and Sickles (1984) in measuring fixed effect within the group, Schmidt and Sickles (1984) in measuring generalised least squares, Battese and Coelli (1988, 1992, Cornwell et al. (1990), Kumbhakar (1990) and Greene (2005a) deal with the stochastic measure of TE within the panel data settings. Greene (2005a) has the following two variants-true fixed effect (TFE) and true random effect (TRE)-that may have an exponential, truncated normal or half-normal distribution of the inefficiency term. ...
... However, the presence of technical inefficiency is a general phenomenon of the production behaviour; thereby, deterministic frontier hardly makes any sense in the real world. To measure TE, the intellectual history of SFA includes the models of Aigner et al. (1977), Meeusen and van den Broeck (1977), Stevenson (1980) and Greene (2003) in the cross-sectional data analysis, Pitt and Lee (1981) and Schmidt and Sickles (1984) in measuring fixed effect within the group, Schmidt and Sickles (1984) in measuring generalised least squares, Battese and Coelli (1988, 1992, Cornwell et al. (1990), Kumbhakar (1990) and Greene (2005a) deal with the stochastic measure of TE within the panel data settings. Greene (2005a) has the following two variants-true fixed effect (TFE) and true random effect (TRE)-that may have an exponential, truncated normal or half-normal distribution of the inefficiency term. ...
This article examines the productive performance of the Indian food manufacturing industry measured in terms of technical efficiency (TE) of its 13 sub-sectors under the organised sector. For estimating their TE, it makes the use of the Cobb–Douglas production technology with the truncated normal distribution of stochastic inefficiency term (Stevenson, 1980) via Jondrow et al. (1982) estimator of cross-sectional data. Data are sourced from the Annual Survey of Industries, 2017–2018. The results show that this industry, as a whole, observed 92% TE in 2017–2018, but among its sub-sectors, it varied between 100% and 74%, that is, they exhibited differential productive performance. Modern sub-sectors, such as fruits and vegetables, edible oils, bakery and beverage products, realised frontier-level efficiency, while sugar and starch products were identified as marginal performers in the industry. The robustness of the results is confirmed by the non-parametric estimates of TE from the data envelopment analysis. The results are expected to be useful in framing specific policies for these two different groups of food processors. In the case of sub-sectors performing below the frontier, policy actions aiming at pure technical and scale efficiencies, such as capacity building, research, skill programmes, and extension activities, need to be operationalised, while for sub-sectors performing at the frontier, only technological progress needs to be prioritised.
... According to Schmidt and Sickles [67], the stochastic production frontier exhibits inherent superiority over the cross-sectional frontier when presented in panel form. Making assumptions about the distribution of the technical inefficiency term is needed to tell the difference between random shocks and technical inefficiency in the second case. ...
International trade has been regarded as an essential factor in enhancing a country's productivity and efficiency. Nevertheless, developing countries squander money and resources as a result of their deficient institutional quality, impeding their ability to profit from specialization and trade. Therefore, this study intends to investigate the impact of agricultural trade liberalization and governance quality on technical efficiency in Southeast Asia's agricultural sector using balanced panel data spanning from 2002 to 2021. The research utilizes translog stochastic frontier analysis (SFA) with a single-stage maximum likelihood estimation (MLE) to simultaneously calculate the time-varying technical efficiency scores and explore the core factors influencing agricultural inefficiency. The findings reveal that the average output-oriented technical efficiency for ASEAN-8 countries was 94%. This suggests that there is significant potential to enhance technical efficiency in agricultural production by up to 6% by addressing the adverse impacts of technical inefficiency. The research findings further point out that Malaysia is the most technically efficient country, having a technical efficiency score of 99.82%, followed by Vietnam (99.75%), Thailand (99.70%), Lao PDR (98.90%), Myanmar (95.42%), Indonesia (91.64%), the Philippines (90.65%), and Cambodia (76.11%). The results of disaggregated agricultural trade liberalization demonstrate a significant reduction in agricultural inefficiency in Southeast Asia through agricultural exports and imports. The findings also emphasize that improvements in the rule of law positively contribute to agricultural efficiency, whereas enhancements in terms of voice and accountability and regulatory quality appear to reduce it. Based on these findings, the government should consider enlarging open and liberalized trade policies in order to facilitate the exchange of technology and knowledge within the agriculture sector. Additionally, the government should involve farmers, agricultural cooperatives, local communities, and other relevant stakeholders in the decision-making process to ensure that policies address the specific needs and constraints faced by the sector.
... More interesting, if the data allowed it, would be to compare technical efficiency by island and over time, which would require a panel of data. It is very likely that a panel of data would reduce the noise in the data, making it possible to establish a ranking of efficiency between islands (Schmidt and Sickles 1984). In order to separate the error term of the stochastic frontier model into its two components (the inefficiency deviations and the stochastic deviations), Jondrow et al. (1982) proposed a method that allows estimation of the level of technical inefficiency for each observation in the sample, thus overcoming a disadvantage of the stochastic frontier model. ...
Article 9 of the Water Framework Directive (WFD) introduces cost recovery as an instrument aligned with the 'polluter pays' principle, aiming to contribute to the overall well-being of water bodies. In this regard, this research focuses on application of the cost recovery method in the context of the Canary Islands (Spain). The study provides a comprehensive description and analysis of the methodology established for the second cycle of planning (2015–2021) in the Canary Islands, offering a comparative assessment of results for each island. We employ a Stochastic Frontier Model, which allows us to assess the efficiency of different water production techniques. The results should be of great interest to public decision makers in the field of water management to minimize cost, allocate resources efficiently or review water tariffs. The findings underscore substantial variations in cost recovery across islands, emphasizing the need for enhanced water infrastructure methods and data acquisition. Future research needs to extend the years on cost recovery to incorporate economies of scale and type of ownership.
In numerous countries, electricity Distribution System Operators (DSOs) function as local monopolies. To counter potential abuse of monopoly power, regulators, especially in Europe, often employ mechanisms like DSO-specific revenue caps to encourage cost reductions among regulated DSOs. Despite its widespread use, literature concerning ex-post evaluation of the effectiveness of revenue cap regulation, particularly divided into its individual components, is lacking. This paper offers two contributions: First, it shows the advantages of utilizing a semi-parametric panel data StoNED framework methodology as a tool for assessing the impact of revenue caps by evaluating the cost efficiency of regulated DSOs in its individual components. Second, the effectiveness of revenue cap regulation is assessed using the Danish DSOs as a case study. The empirical analysis finds evidence that part of the revenue cap incentive scheme appears to promote cost reductions among regulated Danish DSOs.
JEL Classification: C14, C23, C51, L43, L51, L94, L98
Purpose
The objective of this paper is to advance research concerning the factors affecting the intentions to start-up. In this vein, scholars are more and more interested in perceptual variables, i.e. subjective perceptions that may affect individuals’ intentions to start-up. These can have an internal locus of control (PVIs), if they depend on personal cognitive styles, or an external locus of control (PVEs), if they depend on how individuals perceive environmental stimuli. Usually, scholars investigate them at a micro-level of analysis, by focusing on individuals in a country. Instead, this paper adopts a macro-level analysis. Thus, the research question at the basis of this paper is: whether the impact of perceptual variables (with an internal or external locus of control) on the intentions to start-up varies across countries.
Design/methodology/approach
Stochastic frontier analyses – SFAs are carried out since they allow disentangling technical and random inefficiencies and comparing statistical results. SFAs are based on data retrieved from the Global Entrepreneurship Monitor – GEM website and refer to PIGS (Portugal, Italy, Greece, and Spain) and BRICs (Brazil, Russia, India, and China) countries where entrepreneurship is a vibrant phenomenon, but cultural and economic differences are manifest.
Findings
Concerning the drivers of entrepreneurship, achieved results reveal that some differences exist across PIGS and BRICs countries, but they cannot be generalized so easily.
Originality/value
This paper reveals its originality in reference to the classification of the variables, the macro-level of analysis, and the results that – at the same time – are in line with previous ones, but also offer new insights about perceptual variables in entrepreneurship and – at a wider extent – about the drivers of entrepreneurship.
We propose a flexible stochastic production frontier model with fixed effects for the panel data in which the semiparametric frontier is additive with bivariate interactions. To avoid potential misspecification and/or "wrong skew problem" due to distributional assumptions, we model the conditional mean of the inefficiency to depend on environmental variables and to be known up to a vector of parameters. We propose a difference-based estimator for parameters characterizing the conditional mean of the inefficiency term, a profile series estimator, and a kernel-based one-step backfitting estimator for the frontier to facilitate inference. We establish their asymptotic properties and show that each component in the frontier estimated by the kernel-based backfitting has the same asymptotic distribution as the one estimated with the true knowledge on the other components in the frontier (i.e., the oracle property). Through a Monte Carlo study, we demonstrate that the proposed estimators perform well in finite samples. Utilizing a panel of Chinese firm-level data in 2000-2006, we apply our method to estimate the frontier and efficiency scores and conclude that export plays a significant role in reducing the efficiency of firms.
The World Health Assembly Resolution WHA58.33 in 2005 urged Member States to implement universal health coverage (UHC) to ensure that all people, including the poor and the marginalized, are able to afford essential healthcare services. The Sustainable Development Goal indicator 3.8 is dedicated to the UHC goal. However, evidence shows high levels of catastrophic and impoverishing healthcare expenditure among households in sub-Saharan Africa (SSA). This implies that achieving the UHC goal would require evidence-informed policies which would ensure more value for money and not just more money. This study investigated the factors that influence the efficiency of health systems in SSA. The investigation was carried out in three empirical papers. Paper One evaluated the cost efficiency and the factors that influence the cost efficiency of primary health care facilities (PHCFs) in Ghana using stochastic frontier analysis (SFA) model. The results show that the estimated cost efficiency of Health Centers (HCs) and Community-based Health Planning Services (CHPS) are 61.6% and 85.8%, respectively. Also, HCs (CHPS) with higher medical staff to patients’ ratios are likely to be more cost-efficient (inefficient) than those with lower ratios. Paper two estimated the UHC indices for 30 SSA countries and examined the efficiency with which health systems in SSA are utilizing healthcare resources towards achieving the UHC goal by 2030. The paper uses the bootstrap data envelopment analysis (DEA) model. The results show that the estimated UHC indices for countries in SSA range from a minimum of 52% to a maximum of 81% (SD=8.6%) with a median coverage of 66%. The average bias-corrected efficiency score for healthcare spending efficiency in pursuing the UHC goal is 0.81 (95% CI: 0.77-0.85). Paper three investigated the effect of health care financing policy reforms, particularly social health insurance and broader health financing typologies, on health system efficiency. The results reveal that prepayment health financing arrangements significantly improves health system efficiency.
Efficiency and productivity analysis have been critical in healthcare and economics literature. Despite the tremendous innovation in methodology and data availability, a comprehensive literature review on this topic has not been conducted recently. This article provides a three-part literature review of healthcare efficiency and productivity studies. It begins by reviewing the two primary empirical methods used in healthcare efficiency studies, emphasising the treatment of inefficiency persistence. Second, previous contributions to healthcare productivity research are discussed with a focus on methodology and findings. In the third section, various measures of outputs, inputs, and prices in health literature are explored to determine the extent of consensus in the literature. On the methodological front, the literature review shows that while the Data Envelopment Analysis and the Stochastic Frontier Analysis have been used extensively in healthcare productivity and efficiency studies, their application in the context of longitudinal data is limited. Further, no study currently undertakes to measure the TFP changes and its components that use both primal and dual approaches. There is also a considerable variation in the use of inputs, outputs, and price variables, suggesting that the use of variables in healthcare productivity and efficiency literature rests on the balance between data availability and the research scope.
Numerous programs exist to promote productivity, alleviate poverty, and enhance food security in developing countries. Stochastic frontier analysis can be helpful to assess their effectiveness. However, challenges can arise when accounting for treatment endogeneity, often intrinsic to these interventions. We study maximum likelihood estimation of stochastic frontier models when both the frontier and inefficiency depend on a potentially endogenous binary treatment. We use instrumental variables to define an assignment mechanism and explicitly model the density of the first and second‐stage error terms. We provide empirical evidence using data from a soil conservation program in El Salvador.
In this paper we consider the specification and estimation of the Cobb-Douglas production function model. After reviewing the "traditional" specifying assumptions for the model which are based on deterministic profit maximization, we develop a model in which profits are stochastic and in which maximization of the mathematical expectation of profits is posited. "Sampling theory" and Bayesian estimation techniques for this model are presented.
This paper investigates the impact of international migration on technical efficiency, resource allocation and income from agricultural production of family farming in Albania. The results suggest that migration is used by rural households as a pathway out of agriculture: migration is negatively associated with both labour and non-labour input allocation in agriculture, while no significant differences can be detected in terms of farm technical efficiency or agricultural income. Whether the rapid demographic changes in rural areas triggered by massive migration, possibly combined with propitious land and rural development policies, will ultimately produce the conditions for a more viable, high-return agriculture attracting larger investments remains to be seen.
We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to Italy's entry in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate whether nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off, relying partly on sub-sample estimates and partly on time-varying parameters estimated via the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.
This paper uses a natural experiment approach to identify the effects of an exogenouschange in future pension benefits on workers’ training participation. We use uniquematched survey and administrative data for male employees in the Dutch public sectorwho were born in 1949 or 1950. Only the latter were subject to a major pension reformthat diminished their pension rights. We find that this exogenous shock to pension rightspostpones expected retirement and increases participation in training courses amongolder employees, although exclusively for those employed in large organizations.
In data with a group structure, incidental parameters are included to control for missing variables. Applications include longitudinal data and sibling data. In general, the joint maximum likelihood estimator of the structural parameters is not consistent as the number of groups increases, with a fixed number of observations per group. Instead a conditional likelihood function is maximized, conditional on sufficient statistics for the incidental parameters. In the logit case, a standard conditional logit program can be used. Another solution is a random effects model, in which the distribution of the incidental parameters may depend upon the exogenous variables.
U.S. Trunk Air Carriers, 1972-1977: A Multilateral Com-parison of Total Factor Productivity
- D W Caves
- L R Christensen
- M W Tretheway
CAVES, D. W., CHRISTENSEN, L. R., and TRETHEWAY, M. W. (1981), "U.S. Trunk Air Carriers, 1972-1977: A Multilateral Com-parison of Total Factor Productivity," in Productivity Measurement in Regulated Industries, eds. Thomas G. Cowing and Rodney E.
The Asymptotic Theory of Extreme Order StatisticsMaximum Likelihood Estimation of Econ-ometric Frontier Functions
- J Galambos
GALAMBOS, J. (1978), The Asymptotic Theory of Extreme Order Statistics, New York: John Wiley. GREENE, W. H. (1980), "Maximum Likelihood Estimation of Econ-ometric Frontier Functions," Journal of Econometrics, 13, 27-56.
Distributions in Statis-tics: Continuous Univariate Distributions-i GLS: R2 = .986, a2 = .00142, and ra2 =On the Estimation of Technical Ineffi-ciency in the Stochastic Frontier Production Function Model
- N L Johnson
- S M Kotz
- J Jondrow
- C A K Lovell
- I S Materoy
- P Schmidt
JOHNSON, N. L., and KOTZ, S. M. (1970), Distributions in Statis-tics: Continuous Univariate Distributions-i, New York: John Wiley. GLS: R2 =.986, a2 =.00142, and ra2 =.0259 JONDROW, J., LOVELL, C. A. K., MATEROY, I. S., and SCHMIDT, P. (1982), "On the Estimation of Technical Ineffi-ciency in the Stochastic Frontier Production Function Model," Journal of Econometrics, 19, 233-238.
The Prior Likelihood and Best Linear Unbiased Prediction in Stochastic Coefficient Linear ModelsEfficiency Estimation From Cobb-Douglas Production Functions With Com-posed Error
- L F Lee
- W E Griffiths
- Van Broeck
LEE, L. F., and GRIFFITHS, W. E. (1979), "The Prior Likelihood and Best Linear Unbiased Prediction in Stochastic Coefficient Linear Models," University of New England Working Paper in Econometrics and Applied Statistics, Armidale, Australia. MEEUSEN, W., and VAN DEN BROECK, J. (1977), "Efficiency Estimation From Cobb-Douglas Production Functions With Com-posed Error," International Economic Review, 18, 435-444.