Endogeneity-corrected stochastic frontier with market imperfections

Dibyendu Maiti () and Chiranjib Neogi
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Chiranjib Neogi: Indian Statistical Institute

Empirical Economics, 2024, vol. 67, issue 3, No 10, 1149-1183

Abstract: Abstract While the product and labour market imperfections reveal efficiency losses, they may influence technology adoption and its change, raising the endogeneity issue of productivity and efficiency estimates. Using a two-step approach, this work offers the endogeneity-corrected stochastic frontier for such a contemporaneous relation and accounts for efficiency and productivity losses due to market imperfections. A modified frontier function, defined as the residue per capital unit, has been drawn from the Cobb–Douglas function to estimate the terms containing the product and labour market imperfections along with other factors capturing the levels of technology, scale and technical efficiency. First, a standard frontier panel model estimates technology and technical efficiency terms with a proxy function in polynomials of market imperfection terms used for the contemporaneous relation, and then a GMM approach applies to the residue to estimate the parameters containing market imperfections. The estimated results using the three-digit industries across 17 major Indian states for 2008–2016 reveal a strong presence of product and labour market imperfections and associated efficiency losses. The efficiency in the product market has been lower and has further deteriorated in most industries, but not in the labour market.

Keywords: SFM; Market inefficiencies; Endogeneity; Productivity growth; TFPG; Decomposition (search for similar items in EconPapers)
JEL-codes: D24 F16 L11 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Endogeneity Corrected Stochastic Frontier with Market Imperfections (2020)
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DOI: 10.1007/s00181-024-02577-0

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