Article

‘Comparison of Economic Efficiency Estimation Methods: Parametric and Non-parametric Techniques’

Tamkang University, T’ai-pei, Taipei, Taiwan
Manchester School (Impact Factor: 0.26). 09/2002; 70(5):682-709. DOI: 10.1111/1467-9957.00320
Source: RePEc

ABSTRACT

This paper employs a wide range of parametric and non-parametric cost frontiers' efficiency estimation methods to estimate economic efficiency and economies of scale, using the same panel data of 22 Taiwanese commercial banks over the period 1982-1997. According to our empirical implementation, the two methodologies yield similar average efficiency estimates, yet they come to very dissimilar results pertaining to the efficiency rankings, the stability of measured efficiency over time, the consistency between frontier efficiency and conventional performance measures, and the estimates of scale economies. Thus, the choice of an estimation approach can result in very different conclusions and policy implications regarding cost efficiencies and cost economies. These findings are not meaningless to the extent that they are advisable in making policy decisions and evaluations that rely on multiple techniques and specifications. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

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    • "For example, the average efficiency scores obtained by DEA and SFA are similar in studies by Huang and Wang (2002) and Weill (2004), but dissimilar in studies by Dong, Hamilton, and Tippett (2014) andDelis et al. (2009). The consistency in efficiency score rankings obtained by SFA and DEA are moderate in the study by Dong, Hamilton, and Tippett (2014), but low in the studies byHuang and Wang (2002)and Weill (2004). The efficiency distribution and the inefficiency source are remarkably similar in a study byWadud and White (2000). "
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    • "found very high rank-order correlations between DEA and SFA, whereas Ferrier and Lovell (1990) found rank-order correlation of only 0.02 (not significantly different from zero). Also, in the most recent study, Huang and Wang (2002), using a panel of Taiwanese commercial banks, report that parametric and non-parametric methods are generally contradictory in ranking the sample banks based on their estimated efficiency scores. In contrast, Eisenbeis et al. (1997) found that while the calculated programming inefficiency scores derived from the DEA approach are two to three times larger than those estimated using a 5 For a detailed discussion of the pros and cons of each methodology see Coelli et al. (2005). "
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