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Choosing the Technical Efficiency Orientation to Analyze Firms’ Technology: A Model Selection Test Approach

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  • Orea, Luis
  • Roibas, David
  • Wall, Alan

Abstract

We focus on the importance of the assumptions regarding how inefficiency should be incorporated into the specification of the data generating process in an examination of a sector’s production or efficiency. Drawing on the literature on non-nested hypothesis testing, we find that the model selection approach of Vuong (1989) is a potentially useful tool for identifying the best specification before carrying out such studies. We include an empirical application using panel data on Spanish dairy farms where we estimate cost frontiers under different specifications of how inefficiency enters the data generating process (in particular, efficiency is introduced as an input oriented, output oriented and hyperbolic parameter). Our results show that the different models yield very different pictures of the technology and the efficiency levels of the sector, illustrating the importance of choosing the most correct model before carrying out production and efficiency analyses. The Vuong test shows that the input oriented model is the best, whereas the output oriented model is the worst. This is consistent with the fact that the input and output oriented models provide the most and least credible estimates of scale economies given the structure of the sector.

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  • Orea, Luis & Roibas, David & Wall, Alan, 2002. "Choosing the Technical Efficiency Orientation to Analyze Firms’ Technology: A Model Selection Test Approach," Efficiency Series Papers 2002/04, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
  • Handle: RePEc:oeg:wpaper:2002/04
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    Cited by:

    1. Boris Bravo-Ureta & Daniel Solís & Víctor Moreira López & José Maripani & Abdourahmane Thiam & Teodoro Rivas, 2007. "Technical efficiency in farming: a meta-regression analysis," Journal of Productivity Analysis, Springer, vol. 27(1), pages 57-72, February.
    2. Kumbhakar, Subal & Orea, Luis & Rodríguez-Álvarez, Ana & Tsionas, Efthymos, 2003. "Estimating a Mixture of Efficiency Indices," Efficiency Series Papers 2003/08, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    3. Roibas, David & Arias, Carlos, 2004. "Endogeneity Problems in the Estimation of Multi-Output Technologies," Efficiency Series Papers 2004/06, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    4. Subal Kumbhakar & Luis Orea & Ana Rodríguez-Álvarez & Efthymios Tsionas, 2007. "Do we estimate an input or an output distance function? An application of the mixture approach to European railways," Journal of Productivity Analysis, Springer, vol. 27(2), pages 87-100, April.
    5. Antonio Alvarez & Carlos Arias, 2014. "A selection of relevant issues in applied stochastic frontier analysis," Economics and Business Letters, Oviedo University Press, vol. 3(1), pages 3-11.
    6. Rodriguez, Xose Anton & Arias, Carlos, 2008. "The effects of resource depletion on coal mining productivity," Energy Economics, Elsevier, vol. 30(2), pages 397-408, March.
    7. Corton, Maria Luisa & Berg, Sanford V., 2009. "Benchmarking Central American water utilities," Utilities Policy, Elsevier, vol. 17(3-4), pages 267-275, September.
    8. Kumbhakar, Subal & Tsionas, Efthymios, 2003. "Recent Developments in Stochastic Frontier Modeling," Efficiency Series Papers 2003/06, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    9. Carol Newman & Alan Matthews, 2006. "The productivity performance of Irish dairy farms 1984–2000: a multiple output distance function approach," Journal of Productivity Analysis, Springer, vol. 26(2), pages 191-205, October.
    10. Álvarez, Antonio & Arias, Carlos & Kumbhakar, Subal, 2003. "Empirical Consequences of Direction Choice in Technical Efficiency Analysis," Efficiency Series Papers 2003/02, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).

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