Non-structural and structural models in productivity analysis: study of the British Isles during the 2007–2009 financial crisis

The paper compares unrestricted and restricted reduced-form estimates of productivity and efficiency performance constructed from non-structural stochastic frontier analysis (SFA) and the structural models of Olley–Pakes (OP), Ackerberg–Caves–Frazer (ACF), Pakes–McGuire (PM), and Midrigan–Xu (MX). These methods are used to estimate changes in firm-level manufacturing productivity in the British Isles before and after the 2007–2009 financial crisis using the Financial Analysis Made Easy (FAME) data set over the period 2005–2012. The empirical results indicate that overall technical efficiency was not impacted to any substantial degree by the financial crisis, according to all models. The empirical results also indicate substantial agreement in the predictions of productivity growth for the three models. The SFA framework (and related DEA approaches) is used internationally to set tariffs in regulated industries. To have SFA, and the OP/ACF/PM/MX models that are more highly leveraged on economic optimizing assumptions, provide comparable estimates of productivity and efficiency change is reassuring. However, it also would suggest that structural approaches may not provide regulators much new information about efficiency and productivity than would less structural approaches such as SFA, while being less transparent and more difficult to justify to regulators as well as to the courts to which regulated firms often turn for relief from tariffs they perceive to be unfair or onerous.