CEBA talks 2020-2024
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Technical efficiency and inefficiency: Reassurance of standard SFA models and a misspecification problem

Authors: Kumbhakar, Subal C.; Peresetsky, Anatoly; Shchetynin, Yevgenii; Zaytsev, Alexey

Abstract: This paper formally proves that if inefficiency (u) is modelled through the variance of which is a function of then marginal effects of on technical inefficiency (TI) and technical efficiency (TE) have opposite signs. This is true in the typical setup with normally distributed random error and exponentially or half-normally distributed for both conditional and unconditional TI and TE. We also provide an example to show that signs of the marginal effects of on TI and TE may coincide for some ranges of z. If the real data comes from a bimodal distribution of u, and we estimate model with an exponential or half-normal distribution for u, the estimated efficiency and the marginal effect of on TE would be wrong. Moreover, the rank correlations between the true and the estimated values of TE could be small and even negative for some subsamples of data. This result is a warning that the interpretation of the results of applying standard models to real data should take into account this possible problem. The results are demonstrated by simulations.

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