Examining Production Efficiency in Higher Education: The Utility of Stochastic Frontier Analysis

Abstract

Production frontier analysis and the technical efficiency of production are conceptual tools that can provide insight into the production efficiency of colleges and universities. This chapter provides an overview of the theoretical and conceptual underpinnings of stochastic frontier analysis (SFA) and its application to degree production efficiency in higher education. The theoretical background, conceptual basis, statistical properties, and application of different types of SFA models that are used to generate measures of production efficiency are discussed. True fixed-effects (TFE), true random-effects (TRE), random parameter (RP), and latent class (LC) are among the SFA models introduced and discussed. Using cross-sectional and panel data and various models, this chapter demonstrates how SFA can be employed to examine bachelor’s degree productivity of master’s comprehensive universities. Differences in estimates of the technical efficiency of degree production across TFE, TRE, RP, and LC models of SFA, with different distributional assumptions of technical efficiency are discussed. The chapter also provides an example of the utility of a SFA model and how it is used to rank institutions based on their technical efficiency of degree production. It concludes with recommendations for future applications of SFA models in higher education.