A Recursive Thick Frontier Approach to Estimating Production Efficiency*
| Author | Paul H. Schure,Rien J. L. M. Wagenvoort |
| Date | 01 April 2006 |
| Published date | 01 April 2006 |
| DOI | http://doi.org/10.1111/j.1468-0084.2006.00158.x |
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A Recursive Thick Frontier Approach
to Estimating Production Efficiency*
Rien J. L. M. Wagenvoortand Paul H. Schureà
Economic and Financial Studies, European Investment Bank, Luxembourg
(e-mail: wagenvoo@eib.org)
àDepartment of Economics, University of Victoria, Victoria, Canada
(e-mail: schure@uvic.ca)
Abstract
We introduce a new panel data estimation technique for production and cost
functions, the recursive thick frontier approach (RTFA). RTFA has two
advantages over existing econometric frontier methods. First, technical
inefficiency is allowed to be dependent on the explanatory variables of the
frontier model. Secondly, RTFA does not hinge on distributional assumptions
on the inefficiency component of the error term. We show by means of
simulation experiments that RTFA outperforms the popular stochastic frontier
approach and the ‘within’ ordinary least squares estimator for realistic
parameterizations of a productivity model. Although RTFAs formal statistical
properties are unknown, we argue, based on these simulation experiments, that
RTFA is a useful complement to existing methods.
I. Introduction
The technical or X-efficiency of a firm measures the extent to which the firm’s
realized output is in line with the production frontier, i.e. the output realized
by the ‘best practice’ firms as a function of the input bundle. In the last
*This paper was, in part, written while the second author visited the European Investment Bank
(EIB) in Luxembourg. The views expressed in this paper are those of the individual authors and do
not necessarily reflect the position of the EIB. We thank two referees, Søren Johansen, Dermot
O’Brien, seminar participants of the 1999 Econometric Society European Meeting in Santiago de
Compostela and especially Jonathan Temple (the editor) for useful comments. All remaining errors
are ours.
JEL Classification numbers: C23, D24.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 68, 2 (2006) 0305-9049
183
ÓBlackwell Publishing Ltd, 2006. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA.
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