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Economic Theory and Econometric Practice: Parametric Efficiency Analysis

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Abstract

Parametric efficiency analysis is one of the most investigated areas in applied production economics. Nevertheless, the vast majority of empirical studies are not accompanied by a thorough theoretical interpretation of the underlying functional form and the obtained estimates. The robustness of policy suggestions based on inferences from efficiency measures nevertheless crucially depends on theoretically well-founded estimates. This research contribution adresses parametric efficiency measurement by critically reviewing the theoretical consistency of recently published technical efficiency estimates. The theoretical concerns are verified by empirical applications confirming 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. Bootstrapping based stochastic simulations of a simple parametric efficiency model by using different flexible functional forms confirmed the severeness of the theoretical concerns especially with respect to the merely locally restrictable translog specification.

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  1. Food and Resource Economics Institute, Royal Veterinary and Agricultural University, Copenhagen, Denmark

    Johannes Sauer

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  1. Johannes Sauer
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Sauer, J. Economic Theory and Econometric Practice: Parametric Efficiency Analysis. Empirical Economics 31, 1061–1087 (2006). https://doi.org/10.1007/s00181-006-0068-3

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