Combining aggregate production function and technical efficiency: Indonesian case study

Abstract

Besides frontiers and Data Enveloped Analysis approaches, a combination between the aggregate production function and technical efficiency can be performed using the Corrected Ordinary Least Square approach. Unfortunately, there are no studies in Indonesia that use this approach. This paper mainly studies how the Corrected Ordinary Least Square approach combines aggregate production function and technical efficiency. The methods are aggregate production function modeling, aggregate production function correcting, and technical efficiency measuring. The data are Gross Regional Domestic Product at a constant price, the number of workers, investment expenditure, education, and health data of Indonesian provinces from 2015 to 2020. There are three results. First, the Indonesian fixed effect panel data aggregate production function is the best model. In this model, Gross Regional Domestic Product at a constant price is influenced by the number of workers, investment expenditure, and human capital. Human capital consists of education and health level. Second, the deterministic frontier aggregate production function shifts the best-fixed effect model so that the constant becomes –15.36. Third, the Indonesian technical efficiency when no factors influence inefficiency is on average 0.9936. All the results indicate that human capital, aggregate production and technical efficiency combination, and the Corrected Ordinary Least Square approach are practical values.