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Adjustment of inputs and measurement of technical efficiency: A dynamic panel data analysis of the Egyptian manufacturing sectors

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Abstract

The purpose of this article is to construct a dynamic stochastic production frontier incorporating the sluggish adjustment of inputs, to measure the speed of adjustment of output, and to compare the technical efficiency estimates from this dynamic model to those from a static model. By assuming instantaneous adjustment of all inputs, a static model may underestimate technical efficiency of a production unit in the short-run. However, in this article I show that under the assumption of similar adjustment speed for all inputs, a linear partial adjustment scheme for output characterizes the dynamic production frontier. The dynamic frontier with time-invariant technical efficiency is estimated using the system GMM (generalized method of moments) estimator. Applying the model and estimation method on a panel data set spanning 9 years of data on private manufacturing establishments in Egypt, I find that (1) the speed of adjustment of output is significantly lower than unity, (2) the static model underestimates technical efficiency by 4.5 percentage points on average, and (3) the ranking of production units based on their technical efficiency measures changes when the lagged adjustment process of inputs is taken into account.

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Authors and Affiliations

  1. Department of Economics and International Business, Sam Houston State University, Huntsville, TX, 77341, USA

    Aditi Bhattacharyya

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  1. Aditi Bhattacharyya
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Correspondence to Aditi Bhattacharyya.

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Bhattacharyya, A. Adjustment of inputs and measurement of technical efficiency: A dynamic panel data analysis of the Egyptian manufacturing sectors. Empir Econ 42, 863–880 (2012). https://doi.org/10.1007/s00181-011-0467-y

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  • DOI: https://doi.org/10.1007/s00181-011-0467-y

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