Measuring Efficiency Performance in Economic Productivity Function: Parametric and Non-Parametric Frontier Approach

Roslah Arsad
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Roslah Arsad: Mathematical Sciences Studies, College of Computing, Informatic and Mathematics, Universiti Teknologi MARA (UiTM), Perak Branch, Tapah Campus, 35400 Tapah Road, Perak, Malaysia

International Journal of Research and Innovation in Social Science, 2024, vol. 8, issue 8, 4162-4172

Abstract: The parametric and non-parametric frontier approach is the famous frontier measurement efficiency in economic productivity. Many researches on economics-based has focused on efficiency. Basically, efficiency comprises two important components. First is technical efficiency and second is allocative efficiency. Combination of technical and allocative efficiency called as economic efficiency. In order to measure both components of efficiency, parametric and non-parametric approaches have been utilized to either estimate or calculate the efficiency frontier. Many studies have adopted non-parametric, deterministic approach such as Data Envelopment Analysis (DEA) that impose no functional form on the cost or production function, but parametric estimation of cost, production, or profit functions are more relevant approach in the economics-based literature. Stochastic Frontier Approach (SFA) is the most popular among parametric model approach. Deterministic frontier functions can be solved using either mathematical programming or econometric techniques, while stochastic specifications are estimated solely through econometric methods. This study’s main contribution is a review of efficiency concepts, measurement methods, and the strengths, limitations, and data requirements of parametric and non-parametric models.

Date: 2024
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