Adjuatment of Inputs and Measurement of Technical Efficiency: A Dynamic Panal Data Analysis of the Egyptian Maufacturing Sectors

19 Pages Posted: 14 Jul 2014

See all articles by Aditi Bhattacharyya

Aditi Bhattacharyya

Sam Houston State University - College of Business Administration - Department of Economics and International Business

Date Written: 2009

Abstract

The purpose of this paper 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 paper 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 dataset spanning nine 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.

Keywords: Adjustment of inputs, Dynamic panel data models, Stochastic production frontier, Time-invariant technical efficiency

JEL Classification: C23, D24, L60

Suggested Citation

Bhattacharyya, Aditi, Adjuatment of Inputs and Measurement of Technical Efficiency: A Dynamic Panal Data Analysis of the Egyptian Maufacturing Sectors (2009). Empirical Economics (2012) 42: 863 - 880, Available at SSRN: https://ssrn.com/abstract=2465044

Aditi Bhattacharyya (Contact Author)

Sam Houston State University - College of Business Administration - Department of Economics and International Business ( email )

SHSU Box 2118
Huntsville, TX 77341-2118
United States

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