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Stochastic Production Frontier and Technical Inefficiency: A Sensitivity Analysis 

Authors: Rafik Baccouche a; Mokhtar Kouki b
Affiliations:   a University of Tunis El Manar, Tunis, Tunisia
b LEGI—Polytechnics of Tunisia and University of Tunis, Tunis, Tunisia
DOI: 10.1081/ETC-120017975
Publication Frequency: 6 issues per year
Published in: journal Econometric Reviews, Volume 22, Issue 1 January 2003 , pages 79 - 91
Formats available: HTML (English) : PDF (English)
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Abstract

The present paper focuses attention on the sensitivity of technical inefficiency to most commonly used one-sided distributions of the inefficiency error term, namely the truncated normal, the half-normal, and the exponential distributions. A generalized version of the half-normal, which does not embody the zero-mean restriction, is also explored. For each distribution, the likelihood function and the counterpart of the estimator of technical efficiency are explicitly stated (Jondrow, J., Lovell, C. A. K., Materov, I. S., Schmidt, P. ([1982]), On estimation of technical inefficiency in the stochastic frontier production function model, J. Econometrics19:233-238). Based on our panel data set, related to Tunisian manufacturing firms over the period 1983-1993, formal tests lead to a strong rejection of the zero-mean restriction embodied in the half normal distribution. Our main conclusion is that the degree of measured inefficiency is very sensitive to the postulated assumptions about the distribution of the one-sided error term. The estimated inefficiency indices are, however, unaffected by the choice of the functional form for the production function.
Keywords: Stochastic frontier; Farrell's technical inefficiency; Unbalanced panel data; Composed disturbance error; One-sided distribution
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