Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry

John Cummins and Hongmin Zi

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: The objective of this paper is to provide new information on the performance of efficiency estimation methods by applying a wide range of econometric and mathematical programming techniques to a sample of U.S. life insurers. Average efficiencies differ significantly across methods. The efficiency rankings are well-preserved among the econometric methods; but the rankings are less consistent between the econometric and mathematical programming methods and between the data envelopment analysis and free disposal hull techniques. Thus, the choice of estimation method can have a significant effect on the conclusions of an efficiency study. Most of the insurers in the sample display either increasing or decreasing returns to scale, and stock and mutual insurers are found to be equally efficient after controlling for firm size.

Key words: Efficiency estimation, stochastic frontiers, data envelopment analysis, free disposal hull, life insurance industry, organizational form.

Date: 1997-07
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Journal Article: Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry (1998)
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