Modeling technical inefficiencies effects in a stochastic frontier production function for panel data

Abstract

A stochastic frontier production function is defined for panel data on tea industries, in which the non-negative technical inefficiency effects are assumed to be a function of industry-specific variables and time. The inefficiency effects are assumed to be independently distributed as truncations of normal distributions with constant variances but with means it is a linear function of observable variables. Panel data were used in this study to estimate the production frontier and the technical inefficiency effects of tea production using a Stochastic Frontier Analysis (SFA) methodology. An empirical application of the model is obtained using up to fifteen years of data on tea industries from seven tea regions of Bangladesh. The study observed that Stochastic Frontier Translog Production Function was more preferable compared to Stochastic Frontier Cobb-Douglas Production Function. The findings suggested that 49% technical inefficiency existed in tea yield. The null hypotheses, that the inefficiency effects are not stochastic or do not depend on the labor-specific variables and time of observations, are rejected for these data. This study also revealed that their existence was a negative relationship between size and yield. Key words: Efficiency, stochastic frontier Translog production function, Bangladesh tea Industry.