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

Luis Orea, David Roibás () and Alan Wall

No 2002/04, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

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.

Keywords: Cost frontier; technical efficiency; non-nested hypothesis testing; Vuong test (search for similar items in EconPapers)
Pages: 31
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.unioviedo.es/oeg/ESP/esp_2002_04.pdf (application/pdf)

Related works:
Journal Article: Choosing the Technical Efficiency Orientation to Analyze Firms' Technology: A Model Selection Test Approach (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oeg:wpaper:2002/04

Access Statistics for this paper

More papers in Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG) Departamento de Economía, Facultad de Economía y Empresa, Universidad de Oviedo, Avenida del Cristo, s/n. 33006 Oviedo - SPAIN. Contact information at EDIRC.
Bibliographic data for series maintained by Luis Orea () and David Roibas ().