Is it Efficient to Analyse Efficiency Rankings?

Abstract

When production functions are estimated as frontier functions, the deviations from the frontier can be interpreted as individual inefficiency estimates. Unfortunately, it has recently been shown that efficiency differences across individuals are very often statistically insignificant. In this paper, we will analyse the consequences of the consideration of confidence statements for the reliability of efficiency rankings. The stochastic frontier and confidence intervals derived by Horrace and Schmidt are compared to the COLS approach and bootstrap confidence intervals. The membership function is proposed as a simple Monte-Carlo approximation for the probability for an individual to be the most efficient in the sample.

Keywords: Bootstrap, confidence intervals, frontiers, inefficiency, membership function, ranking

JEL Classification: C2, C4, C6, J3