An Alternative Specification for Technical Efficiency Effects in a Stochastic Frontier Production Function

Abstract

This paper proposes an alternative specification for technical efficiency effects in a stochastic production frontier model. The proposed specification is distribution free and thus eschews one-sided error term present in almost all the existing inefficiency effects models. The efficiency effects are represented by the standard normal cumulative distribution function of exogenous variables which ensures the efficiency scores to lie in a unit interval. An empirical exercise based on widely used Philippines rice farming data set illustrates the simplicity and usefulness of the proposed model.

Keywords: Non-linear least squares, Standard normal cumulative distribution function, Technical efficiency

JEL Classification: C51, D24, Q12