engleski

How to estimate technical efficiency?

Measurement of efficiency (production, cost or profit efficiency) has become a very popular field in applied economics in recent decades. The aim of this paper is to explain the measurement of technical efficiency from a theoretical point of view. Technical efficiency relates actual output to the maximum possible and is defined as the ratio of the actual output to the maximum potential output. The potential output for given inputs and technology is the maximum possible output that defines the frontier. We can say that the firm due to technical inefficiency produce under the defined frontier. In this paper we give a theoretical approach how to estimate the frontier function so that efficiency can be estimated. The frontier is often viewed as stochastic, so we use stochastic frontier analysis (SFA) to estimate efficiency. We relate these developments to Harvey Leibenstein's original 1966 insight into his x-efficiency.

technical efficiency ; stochastic frontier analysis ; production function

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