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In this chapter, we utilize the residual concept of productivity measures defined in the context of normal-gamma stochastic frontier production model with heterogeneity to differentiate productivity and inefficiency measures. In particular, three alternative two-way random effects panel estimators of normal-gamma stochastic frontier model are proposed using simulated maximum likelihood estimation techniques. For the three alternative panel estimators, we use a generalized least squares procedure involving the estimation of variance components in the first stage and estimated variance–covariance matrix to transform the data. Empirical estimates indicate difference in the parameter coefficients of gamma distribution, production function, and heterogeneity function variables between pooled and the two alternative panel estimators. The difference between pooled and panel model suggests the need to account for spatial, temporal, and within residual variations as in Swamy–Arora estimator, and within residual variation in Amemiya estimator with panel framework. Finally, results from this study indicate that short- and long-run variations in financial exposure (solvency, liquidity, and efficiency) play an important role in explaining the variance of inefficiency and productivity.

The purpose of this paper is to consider a new application of stochastic frontier analysis, in which the method is applied to demand data for a food product category, in an attempt to benchmark category consumption and segment food consumers.

In a unified, two‐stage approach, a stochastic frontier model is first estimated and subsequently deviations from the demand frontier are regressed on customer characteristics. The method is illustrated in scanner panel data.

A frontier demand function estimated in scanner data of a frequently‐bought food category has significant and consistent parameters. Specific descriptor variables can explain excessive category demand and profile customers with considerable sales potential.

More work is needed to generalise the usefulness of the proposed model in different food categories. Future research may employ alternative functional specifications and explanatory variables.

The empirical identification of salient characteristics improves consumer understanding and can assist in the design of data‐driven marketing action. Applied researchers can use marketing and demographic variables that are found in standard consumer panels to estimate frontier models.

The paper introduces stochastic frontier analysis as a means to determine consumer differences in food demand. This is an important area for retailers, producers and researchers.

This chapter provides a survey of alternative methodologies for measuring and comparing productivity and efficiency of airlines, and reviews representative empirical studies. The survey shows the apparent shift from index procedures and traditional OLS estimation of production and cost functions to stochastic frontier methods and Data Envelopment Analysis (DEA) methods over the past three decades. Most of the airline productivity and efficiency studies over the last decade adopt some variant of DEA methods. Researchers in the 1980s and 1990s were mostly interested in the effects of deregulation and liberalization on airline productivity and efficiency as well as the effects of ownership and governance structure. Since the 2000s, however, studies tend to focus on how business models and management strategies affect the performance of airlines. Environmental efficiency now becomes an important area of airline productivity and efficiency studies, focusing on CO₂ emission as a negative or undesirable output. Despite the fact that quality of service is an important aspect of airline business, limited attempts have been made to incorporate quality of service in productivity and efficiency analysis.

This paper analyses the cost efficiency of Italian football clubs using a stochastic frontier model. The frontier estimation confirmed that the model fits the data well with all coefficients correctly signed and in line with the theoretical requirements. Marketing and Sponsorship is taken into account as an explanatory variable and the factors which contributed to these findings, as well as other policy implications, are provided.

Estimation of (in)efficiency became a popular practice that witnessed applications in virtually any sector of the economy over the last few decades. Many different models were deployed for such endeavors, with Stochastic Frontier Analysis (SFA) models dominating the econometric literature. Among the most popular variants of SFA are Aigner, Lovell, and Schmidt (1977), which launched the literature, and Kumbhakar, Ghosh, and McGuckin (1991), which pioneered the branch taking account of the (in)efficiency term via the so-called environmental variables or determinants of inefficiency. Focusing on these two prominent approaches in SFA, the goal of this chapter is to try to understand the production inefficiency of public hospitals in Queensland. While doing so, a recognized yet often overlooked phenomenon emerges where possible dramatic differences (and consequently very different policy implications) can be derived from different models, even within one paradigm of SFA models. This emphasizes the importance of exploring many alternative models, and scrutinizing their assumptions, before drawing policy implications, especially when such implications may substantially affect people’s lives, as is the case in the hospital sector.

Using a panel of 1,122 UK firms listed on the London Stock Exchange over the period of 1981-2009, corporate efficiencies are predicted in this paper as inverse proxies of agency cost and the agency cost hypotheses are tested. The paper aims to discuss this issue.

Stochastic frontier analysis is used to estimate corporate efficiency of firms, but from two different perspectives. The long-run and short-run corporate efficiencies are predicted focussing on modern approach of value maximization and traditional approach of profit maximization, respectively.

The estimation results reveal that, an average firm in the sample achieves 74.5 percent of its best performing peer's market value and 86.6 percent of its best performing peer's profit and both of them are highly significant in the analysis. The long-run market value efficiency supports the agency cost of outside equity and the short-run profit efficiency supports the agency cost of outside debt hypothesis. Also there is a positive rank correlation between these two efficiencies which confirms that an average firm in the UK suffers from inefficiency or agency conflicts to a certain extent, no matter whether the firm is driven by short-run or long-run growth perspectives.

The predicted broad measures of agency costs in the paper have wider implications in enhancing the understanding of the UK firms’ corporate performance especially when they operate under a relatively free and market based governance and financial system.

The work is distinguished by the large panel of UK firms and a long period of time that is considered. Emphasizing on the empirical implications of the distinctions between short-run and long-run efficiency is also novel.

A semiparametric stochastic frontier model is proposed for panel data, incorporating several flexible features. First, a constant elasticity of substitution (CES) production frontier is considered without log-transformation to prevent induced non-negligible estimation bias. Second, the model flexibility is improved via semiparameterization, where the technology is an unknown function of a set of environment variables. The technology function accounts for latent heterogeneity across individual units, which can be freely correlated with inputs, environment variables, and/or inefficiency determinants. Furthermore, the technology function incorporates a single-index structure to circumvent the curse of dimensionality. Third, distributional assumptions are eschewed on both stochastic noise and inefficiency for model identification. Instead, only the conditional mean of the inefficiency is assumed, which depends on related determinants with a wide range of choice, via a positive parametric function. As a result, technical efficiency is constructed without relying on an assumed distribution on composite error. The model provides flexible structures on both the production frontier and inefficiency, thereby alleviating the risk of model misspecification in production and efficiency analysis. The estimator involves a series based nonlinear least squares estimation for the unknown parameters and a kernel based local estimation for the technology function. Promising finite-sample performance is demonstrated through simulations, and the model is applied to investigate productive efficiency among OECD countries from 1970–2019.

This chapter examines the effect of the division of labor from a Bayesian viewpoint. While organizational reforms are crucial for cost reduction in the Japanese water supply industry, the effect of labor division in intra-organizational units on total costs has, to the best of our knowledge, not been examined empirically. Fortunately, a one-time survey of 79 Japanese water suppliers conducted in 2010 enables us to examine the effect. To examine this problem, a cost stochastic frontier model with endogenous regressors is considered in a cross-sectional setting, because the cost and the division of labor are regarded as simultaneously determined factors. From the empirical analysis, we obtain the following results: (1) total costs rise when the level of labor division becomes high; (2) ignoring the endogeneity leads to the underestimation of the impact of labor division on total costs; and (3) the estimation bias on inefficiency can be mitigated for relatively efficient organizations by including the labor division variable in the model, while the bias for relatively inefficient organizations needs to be controlled by considering its endogeneity. In summary, our results indicate that integration of internal sections is better than specialization in terms of costs for Japanese water supply organizations.

The purpose of this paper is to measure technical efficiency and examine its determinants while disentangling unobserved time-invariant heterogeneity from actual inefficiency using comprehensive household-level panel data.

This paper estimates technical efficiency based on the true random-effects stochastic production frontier estimator with a Mundlak adjustment. By utilising comprehensive panel data with 4,694 observations from 39 districts of four major maize-producing regions in Ethiopia, the author measures technical efficiency and examine its determinants while disentangling unobserved time-invariant heterogeneity from technical inefficiency. By using competing stochastic production frontier estimators, the author provides insights into the influence of farm heterogeneity on measuring farm efficiency and the subsequent impact on the ranking of farmers based on their efficiency scores.

The study results indicate that ignoring unobservable farmer heterogeneity leads to a downwards bias of technical efficiency estimates with a consequent effect on the ranking of farmers based on their efficiency scores. The mean technical efficiency score implied that about a 34% increase in maize productivity can be achieved with the current input use and technology in Ethiopia. The key determinants of the technical inefficiency of maize farmers are the age, gender and formal education level of the household head, household size, income, livestock ownership, and participation in off-farm activities.

While the findings of this study are critical for informing policy on improving agricultural production and productivity, a few important things are worth considering in terms of the generalisability of the findings. First, the study relied on secondary data, so only a snapshot of environmental factors was accounted for in the empirical estimations. Second, there could be other sources of unmeasured potential sources of heterogeneity caused by persistent technical inefficiency and endogeneity of inputs. Third, the study is limited to one country. Therefore, future research should extend the analysis to ensure the generalisability of the empirical findings regarding the extent to which unmeasured potential sources of heterogeneity caused by persistent technical inefficiency, endogeneity of inputs and other unobservable country-specific features – such as geographical differences.

This paper contributes to the literature on agricultural productivity and efficiency by providing new evidence on the influence of unobservable heterogeneity in a farm efficiency analysis. While agricultural production is characterised by heterogeneous production conditions, the influence of unobservable farm heterogeneity has generally been ignored in technical efficiency estimations, particularly in the context of smallholder farming. The value of this paper comes from disentailing producer-specific random heterogeneity from the actual inefficiency.

Since China's accession of the World Trade Organization (WTO), its construction industry has attained unprecedented growth. However, for the sources of this enormous growth, a controversy regarding the total factor productivity growth (TFPG) still remains in production practice and extant studies. In view of this, the purpose of this paper is to measure TFPG and to explore its sources in the industry post-WTO accession.

This study presents an innovative source analysis of TFPG. Stochastic frontier approach is adopted to measure TFPG and to explore its sources by decomposing TFPG into technical progress (TP), technical efficiency change (TEC), allocative efficiency change (AEC) and scale efficiency change (SEC). Although China joined WTO in 2001, to provide an effective baseline, the study period is from 2000 to 2017.

The empirical results reveal that TFPG presented an overall downward evolutionary trend, but it still maintained a high growth post-WTO accession. From the perspective of decomposition, TP was the main source of TFPG. Furthermore, as a neglected source, interaction effects among TP, TEC, AEC and SEC have been demonstrated to have a significant influence on the cumulative TFPG.

To make the results be reliable, the authors discuss the empirical findings mainly by revealing the reasons behind the evolutions of TFPG and its sources. Based on these revealed reasons, government and policy makers can further refine and summarize some more detailed and targeted policy implications to improve TFPG.

By providing many empirical evidences to solve the aforesaid TFPG controversy, this paper, therefore, enriches the body of knowledge on growth theories, especially at the level of industrial economics.