Directional technology distance functions through duality

Abstract

I provide an estimation procedure for directional technology distance functions (DTDF) through duality to avoid the unnecessarily often-used restrictive assumption that the DTDF is quadratic. I use a semi-parametric specification which avoids the imposition of restrictive functional forms on the profit function. Through the new procedure, one can obtain estimates of the distance function, its derivatives with respect to directions at observed points, as well as estimates of profit inefficiency. The dual formulation is estimated using the Bayesian version of Generalized Method of Moments of Gallant et al. (2017). An empirical application to U.S. banks reveals important aspects of technical as well as allocative inefficiency.