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Estimation of production technology when the objective is to maximize return to the outlay

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  • Kumbhakar, Subal C.

Abstract

This paper deals with estimation of production technology where endogeneous choice of input and output variables is explicitly recognized. To address this endogeneity issue, we assume that producers maximize return to the outlay. We start from a flexible (translog) transformation function with a single output and multiple inputs and show how the first-order conditions of maximizing return to the outlay can be used to come up with an 'estimating equation' that does not suffer from the econometric endogeneity problem although the output and input variables are chosen endogenously. This is because the regressors in this estimating equation are in ratio forms which are uncorrelated with the error term under the assumption that producers maximize return to the outlay. The analysis is then extended to the multiple outputs and multiple inputs case with technical inefficiency. Although the estimating equations in both single and multiple output cases are neither production nor distance functions, they can be estimated in a straightforward manner using the standard stochastic frontier technique without worrying about endogeneity of the regressors. Thus, we provide a rationale for estimating the technology parameters consistently using an econometric model which requires data on only input and output quantities.

Suggested Citation

  • Kumbhakar, Subal C., 2011. "Estimation of production technology when the objective is to maximize return to the outlay," European Journal of Operational Research, Elsevier, vol. 208(2), pages 170-176, January.
  • Handle: RePEc:eee:ejores:v:208:y:2011:i:2:p:170-176
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Subal Kumbhakar & Frank Asche & Ragnar Tveteras, 2013. "Estimation and decomposition of inefficiency when producers maximize return to the outlay: an application to Norwegian fishing trawlers," Journal of Productivity Analysis, Springer, vol. 40(3), pages 307-321, December.
    2. Subal Kumbhakar & Sjur Baardsen & Gudbrand Lien, 2012. "A New Method for Estimating Market Power with an Application to Norwegian Sawmilling," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(2), pages 109-129, March.
    3. Victor Fernandez-Blanco & Ana Rodriguez-Alvarez, 2015. "Measuring allocative efficiency in cultural economics: The case of Fundacion Princesa de Asturias," ACEI Working Paper Series AWP-09-2015, Association for Cultural Economics International, revised Oct 2015.
    4. Tsionas, Mike G., 2017. "Microfoundations for stochastic frontiers," European Journal of Operational Research, Elsevier, vol. 258(3), pages 1165-1170.
    5. repec:bla:pacecr:v:22:y:2017:i:4:p:702-719 is not listed on IDEAS
    6. repec:eee:ejores:v:268:y:2018:i:1:p:361-372 is not listed on IDEAS
    7. Llorca, Manuel & Jamasb, Tooraj, 2017. "Energy efficiency and rebound effect in European road freight transport," Transportation Research Part A: Policy and Practice, Elsevier, vol. 101(C), pages 98-110.
    8. repec:kap:jculte:v:42:y:2018:i:1:d:10.1007_s10824-016-9287-4 is not listed on IDEAS
    9. Kumbhakar, Subal C., 2012. "Specification and estimation of primal production models," European Journal of Operational Research, Elsevier, vol. 217(3), pages 509-518.
    10. Rodríguez-Álvarez, A. & Orea, L. & Jamasb, T., 2016. "Fuel poverty and well-being: a consmer theory and stochastic fronteir approach," Cambridge Working Papers in Economics 1668, Faculty of Economics, University of Cambridge.

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