Stochastic Frontier Analysis Technique Research Articles

The Efficiency and Firm Performance Analysis of Nigeria Manufacturing Firms: Application of Stochastic Frontier Analysis Technique

ABSTRACT: Despite several measures adopted by the government to improve the efficiency of the manufacturing firms in Nigeria, the performance of these firms is below expectation. The poor performance of Nigerian manufacturing firms has prompted concern for Nigeria’s economic prospects in the long run. This needs to be addressed because, under this scenario, most development objectives would be difficult to achieve. Therefore, there is a need for Nigerian manufacturing firms to achieve high productivity to improve their performance. This study, therefore, evaluated the level of technical efficiency and examined the determinants of technical inefficiency in Nigerian manufacturing firms. It employed panel data of fifty-five manufacturing firms quoted in the Nigeria Stock Exchange Market from 1999 to 2020. The result from the Stochastic Frontier Analysis technique showed that all inputs (capital, labor, raw materials, cost of energy and other expenses) impacted positively on firms’ output at a 1% significance level. But the impact of raw material is the highest. It was also found that the mean efficiency for Nigerian manufacturing firms is 52.74%. Finally, it was revealed that the age of the firm, total assets and management efficiency are the technical inefficiency determinants in Nigerian manufacturing firms. This implies that the efficiency level of manufacturing firms in Nigeria can be improved by 47.26%. Also, manufacturing output can be enhanced by providing adequate raw materials. Furthermore, the efficiency of manufacturing firms in Nigeria is enabled by the managerial capability and asset size of the firms. The study suggested that government should give tax concessions on the purchase of raw materials (sourced domestically and externally) to encourage availability and use to optimize production. Also, manufacturing firms should encourage skill acquisition programs through various on-the-job training programs for managers and their entire workforce to boost labor productivity and performance. In addition, policies that will encourage good education system should be adopted by the government which will help the nation to produce trained and skilled labor force. Finally, manufacturing firms should mobilize more resources for the procurement, consolidation and expansion of the size of their assets using their undistributed corporate profit. Through its regulatory bodies [such as Federal Ministry of Industries, Trade and Investment, Nigeria Chamber of Commerce and Industry and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)], government should enforce minimal asset requirements for each sub-sector (industry) as a basis for takeoff and subsequent renewal of licence for the manufacturing firms in Nigeria.

A Radial Basis Function Neural Network for Stochastic Frontier Analyses of General Multivariate Production and Cost Functions.

Production function techniques often impose functional form and other restrictions that limit their applicability. One common limitation in popular production function techniques is the requirement that all inputs and outputs must be positive numbers. There is a need to develop a production function analysis technique that is less restrictive in the assumptions it makes, and inputs it can process. This paper proposes such a general technique by linking fields of neural networks and econometrics. Specifically, two radial basis function (RBF) neural networks are proposed for stochastic production and cost frontier analyses. The functional forms of production and cost functions are considered unknown except that they are multivariate. Using simulated and real-world datasets, experiments are performed, and results are provided. The results illustrate that the proposed technique has broad applicability and performs equal to or better than the traditional stochastic frontier analysis technique.

The stochastic frontier analysis technique in measuring the technical and economic efficiency of hospital diagnostic laboratories: a case study in Iran

An inefficient health system wastes scarce resources even if it makes considerable gains in accountability and equity. Such a system is expected to perform better. Therefore, it is vital to examine the current performance of health systems and their constituents and assess how to reach their maximum potential. This study aimed to evaluate the technical and economic efficiency of medical diagnostic laboratories in hospitals affiliated with Urmia University of Medical Sciences (UUMS) in 2016. In this descriptive-analytical study, data from diagnostic laboratories of the hospitals of UUMS have been inputted into Frontier4.1 software after taking the log of variables. Then, the technical and economic efficiency of the laboratories were obtained by estimating the production and cost function using the stochastic frontier analysis method, assuming input minimization for 2016. The mean technical and economic efficiency score of the diagnostic laboratories were determined to be 93.1% and 51.9%, respectively. These laboratories need to reduce their inputs and costs in order to achieve full efficiency without changing the amount of their output. Although the average economic efficiency of the diagnostic laboratories of the studied hospitals was high, there is still an increase in the efficiency of these units, given the cost of inputs at the time of allocating resources. In addition, it is possible to improve the technical efficiency of the clinical laboratories of hospitals affiliated with UUMS by 48.1% by applying the same level of inputs and without increasing the costs.

External indebtedness in Sub-Saharan Africa: a spatial econometric perspective

The dilemma around external debt accumulation and the increasing burden of debt servicing in sub-Saharan Africa (SSA) remains a repetitive topic in the development debates. The aim of this study is to investigate the determinants of external indebtedness for SSA countries over the period 2002–2020 while accounting for spatial effects. It departs from the classical literature which uses external debt to Gross Domestic Product ratio as a measure of external indebtedness and formulates another measure, referred to as the Indebtedness Index, which is calculated by making use of the Stochastic Frontier Analysis technique. It accounts for the impact of spatial interactions in external debt accumulation behaviour, by applying the Spatial Durbin Model. The findings of the study show evidence of spatial interactions in external indebtedness among SSA nations. The results also show the reduction capacity of higher exports, political stability and government effectiveness on external indebtedness, while higher share of broad money to GDP exacerbates external indebtedness.

Revisiting tax effort in emerging markets

Insufficient tax revenues has been one of the most pervasive restrictions on investment in the social and economic infrastructure needed to close the development gaps in emerging markets (EM). To assess the potential for increasing tax collection, the literature has emphasized the concept of tax capacity and tax effort. Conceptually, tax effort is modeled as an inefficiency term with both time-varying and time-invariant components. These are commonly estimated through OLS or stochastic frontier analysis techniques. However, these strategies provide only point estimates and are limited in their ability to break down tax effort into time-varying and time-invariant components. We estimate tax effort for a balanced panel of 108 countries for which data were available from 2002 to 2017, using a Bayesian strategy that allows us to calculate the invariant inefficiency as an upper bound for a country’s tax effort. We also show that the GTRE model from Tsionas and Kumbhakar (2014 ) allows for more precise estimates, providing powerful tools for more informed fiscal planning.

The Cost of Reducing Municipal Unsorted Solid Waste: Evidence from Municipalities in Chile

The management of municipal solid waste sector is crucial for a sustainable circular economy. Waste utilities are expected to provide high quality solid waste services at an affordable price. The efficient management of solid waste requires its assessment from an economic and environmental perspective, i.e., eco-efficiency assessment. Although the reduction of unsorted waste incurs an economic cost, its positive externalities are huge for the well-being of society, the environment, and people. Our study quantifies the marginal cost of reducing any unsorted waste using stochastic frontier analysis techniques which allow us to estimate the eco-efficiency of the waste sector. Our empirical approach focuses on the municipal solid waste collection and recycling services provided by several waste utilities in Chile. The results indicate that substantial eco-inefficiency in the sector exists, since the average eco-efficiency score is roughly 0.5 which means that the municipalities could approximately halve their operational costs and unsorted waste to produce the same level of output. The average marginal cost of reducing unsorted waste is 32.28 Chilean pesos per ton, although notable differences are revealed among the waste utilities evaluated. The results provided by this study are of great interest to stakeholders to promote sustainable management solutions and resource efficient solid waste services.

Energy efficiency-economic growth nexus: What is the role of income inequality?

The Sustainable Development Goal (SDG) 7 stresses the importance for economies around the world to double their efforts in improving energy efficiency. Energy efficiency improvements have been found to trigger economic growth, albeit empirical evidence to support this claim remains mixed. In a world of widening inequality, how income inequality dynamics affect the growth and energy efficiency nexus is critical, yet empirical research investigating the role of income inequality is lacking. This study addresses this concern by examining the moderating role of income inequality in the economic growth – energy efficiency nexus. The study is based on an unbalanced yearly panel dataset for 51 African countries from 1991 to 2017. We measure energy efficiency using the stochastic frontier analysis technique and apply the two-step generalized method of moments (GMM) technique to examine the direct and indirect effects (moderating through income inequality) of energy efficiency on economic growth. We conduct several robustness checks to ensure consistent estimates of the parameters. We find that, directly, improving upon energy efficiency triggers economic growth, but this is compromised in economies with high-income inequality. The estimated conditional total effect of energy efficiency on economic growth is lower for countries with higher income inequality compared to countries with lower income inequality. By implication, reducing income inequality could be one effective channel through which energy efficiency can trigger economic growth.

Assessing the marginal cost of reducing greenhouse gas emissions in the English and Welsh water and sewerage industry: A parametric approach

Reducing greenhouse gas (GHG) emissions involves effort from different sectors of the economy, including the water and sewerage industry. This study estimates the marginal cost of curtailing GHG emissions in the water and sewerage industry using stochastic frontier analysis techniques for a sample of ten English and Welsh water and sewerage companies over the 2010–2019 period. Results illustrated that the average marginal cost of reducing GHG emissions was 0.181 £/Kg CO2 equivalent. The marginal cost estimated notably differs across companies and over time. Findings further illustrate the impact of water companies' operating characteristics on the marginal cost of reducing carbon emissions.

Financial structure and cooperative efficiency: A pecking‐order evidence from sugarcane farmers in Eswatini

AbstractThis study examines the effect of financial structure on technical efficiency of sugarcane farmer cooperatives (FCs) in Eswatini. Using annual data on 114 FCs from 2014 to 2017, the paper employs the one‐step Stochastic Frontier Analysis technique to estimate technical inefficiency and its determinants. The results indicate that the sugarcane FCs operate with high level of technical efficiency, averaging 85.48%. While all sources of financing were observed to improve technical efficiency, the effects were observed to follow a ‘pecking‐order’, with the greatest effect observed from internal revenue followed by grants and loans. The implications of the findings for financing decisions of FCs in emerging economies are discussed.

Technical efficiency of health-care systems in selected middle-income countries: an empirical investigation

PurposeThis paper aims to evaluate the technical efficiency of the health-care systems in 21 selected middle-income countries during the period (2000–2017) and determine the source of inefficiency whether it is transient (short run) or persistent (long run).Design/methodology/approachThe study uses the stochastic frontier analysis technique through employing the generalized true random effects model which overcomes the drawbacks of the previously introduced stochastic frontier models and allows for the separation between unobserved heterogeneity, persistent inefficiency and transient inefficiency.FindingsPersistent efficiency is lower than the transient efficiency; hence, there are more efficiency gains that can be made by the selected countries by adopting long-term policies that aim at reforming the structure of the health-care system in the less efficient countries such as South Africa and Russia. The most efficient countries are Vietnam, Mexico and China which adopted a social health insurance that covers almost the whole population with the aim of increasing access to health-care services. Also, decentralization in health-care has assisted in adopting health-care policies that are suitable for both the rural and urban areas based on their specific conditions and health-care needs. A key success in the implementation of the adopted long-term policies by those countries is the continuous monitoring and evaluation of their outcomes and comparing them with the predefined targets and conducting any necessary modifications to ensure their movement in the right path to achieve their goals.Originality/valueAlthough several studies have evaluated the technical efficiency both across and within countries using non-parametric (data envelopment analysis) and parametric (stochastic frontier analysis) approaches, to the best of the authors’ knowledge, this is the first attempt to evaluate the technical efficiency of selected middle-income countries during the period (2000–2017) using the generalized true random effects stochastic frontier analysis model.

Determinant of Tax Revenue Effort in Sub-Saharan African Countries: A Stochastic Frontier Analysis

The main objective of this paper was empirically examined the trend and its drivers of tax revenue effort in Sub- Saharan African countries using panel data and stochastic frontier analysis techniques inter alia:- random effect, fixed effect, half-normal, exponential-normal, and truncated-normal analysis for a period of 2000 to 2018. The estimation result shows that tax effort is positively and significantly related to openness, Share of agriculture sector, external debt, share of the construction sector, population growth, age dependency, corruption and GDP per capita and negatively and significantly related with a share of the service sector, official development assistance, foreign direct investment, population density, literacy and official exchange rates. In general, depending on the choice of analysis technique, both supply- side factors and demand - side factors are highly affected tax revenue effort and before designing tax policy, therefore, those concerned bodies be going to first determine their tax revenue effort.

Technical efficiency and corporate structure of Italian Private Hospitals. evidence from a one-step stochastic frontier analysis

ABSTRACT This paper aims to identify the relationship between the output-oriented technical efficiency of Italian private hospitals and their ownership structure. Using the one-step Stochastic Frontier Analysis technique, we explain technical efficiency throughout a set of variables capturing the firm’s shareholder activity, ownership concentration, and managerial ownership. Results suggest that (1) technical efficiency is positively affected by managerial ownership, and (2) private hospitals are more efficient when ownership concentration is low.

Analysis of cost-effectiveness in the provision of air navigation services at functional air blocks

The Single European Sky (SES) legislation is intended to have a major impact on the fragmentation in the European Air Traffic Management and Communications, Navigation and Surveillance (ATM/CNS) system. A fundamental aspect of the SES initiative is functional airspace blocks (FABs), which have the goal of reducing the inefficiencies—in terms of safety, capacity, and cost—that result from the fragmentation of European airspace. FABs are seen as an explicit bottom-up first step toward the ultimate integration of European airspace. In this article, we focus on the analysis of the evolution of the cost-effectiveness in the provision of ATM/CNS services at FABs. We proceed in two stages. First, we develop a theoretical framework that allows us to decompose the change in cost-effectiveness of FABs into its basic sources. Second, we use stochastic frontier analysis techniques to estimate the cost equations and decompose the change in the cost-effectiveness of the nine European FABs into several components. Our analysis sheds light on (1) the drivers of changes in the air navigation service providers (ANSPs) and FABs cost-effectiveness from 2006 to 2016, (2) the role that FABs play in enhancing cooperation between ANSPs to obtain operational efficiency gains, and (3) the existence of economies of scale in the European ATM/CNS service provision.

Tourism forecast combination using the stochastic frontier analysis technique

Forecast combination has received a great deal of attention in the tourism domain. In this article, we propose a novel performance-based tourism forecast combination model by applying a multiple-criteria decision-making framework and the stochastic frontier analysis technique to determine combination weights for individual tourism forecast models. Thirteen time-series models are used to generate individual forecast tourism models, and five competing forecast combination models are selected to evaluate the forecast performance. Using the tourism forecast competition data set, we conclude that the proposed combination model significantly and statistically outperforms the five competing combination models in most cases based on multiple performance indicators. Our results show that the proposed model offers a good solution to identify optimal weights for individual tourism forecast models.

The effect of earnings management on bank efficiency

This paper studies the effects of earnings management practices on bank cost efficiency using banks in five ASEAN countries over the period 1989–2015. By employing Stochastic Frontier Analysis technique for cost efficiency, we find that each country has different efficiency level. Using panel data analysis, we further find that the increase in earnings management practices reduces the bank's efficiency significantly. The findings suggest that the banking supervisors and managers should formulate strategies that focus on the cost efficiency–related initiatives and manages the earnings management practices. With the strategies in place, it could facilitate the economic integration between ASEAN countries.

Profitability and Resource Use Efficiency of Poultry Egg Production in Yobe State, Nigeria

<div><p><em>The study was carried out to determine the profitability and resource use efficiency of poultry-egg production in Yobe State. A sample of 200 poultry-egg farmers was selected by multistage sampling technique and data were collected by using a structured questionnaire. The data were analyzed using descriptive statistics, budgetary analysis, and Stochastic Frontier Analysis techniques. The study revealed that poultry-egg production enterprise is profitable in the study area. Maximum Likelihood Estimate of coefficients of the stochastic frontier model for poultry-egg production were all positive and the parameters estimates of farm size, veterinary services, feed intake and labour were statistically significant, indicating that they contributed incrementally to the total value of poultry-egg output in the study area. Analysis of inefficiency model shows that factors influencing technical efficiency were years of experience, access to credit, cooperative membership and extension contact. Recommendations include the establishment of feed producer cooperative society, provision of adequate and timely veterinary services, and access to credit, frequent extension contacts and adult education classes for the farmers.</em></p></div>

Does entrepreneur dispositional optimism bias affect small firms' technical efficiency

The aim of this paper is to investigate the effect of entrepreneurs' dispositional optimism on small business firm efficiency in the Tunisian context. Using a stochastic frontier analysis technique adjusted to an entrepreneur dispositional optimism bias, we estimate the efficiency score and then we demonstrate that the inefficiency term is explained by entrepreneur dispositional optimism. Our data consists of 67 small firms between 2008 and 2012. Our results highlight that other entrepreneurial characteristics and social network can explain technical efficiency.

Analysis of environmental efficiency variations: A nutrient balance approach

Recent literature has argued that environmental efficiency (EE), which is built on the materials balance (MB) principle, is more suitable than other EE measures in situations where the law of mass conversation regulates production processes. In addition, the MB-based EE method is particularly useful in analysing possible trade-offs between cost and environmental performance. Identifying determinants of MB-based EE can provide useful information to decision makers but there are very few empirical investigations into this issue. This article proposes the use of data envelopment analysis and stochastic frontier analysis techniques to analyse variation in MB-based EE. Specifically, the article develops a stochastic nutrient frontier and nutrient inefficiency model to analyse determinants of MB-based EE. The empirical study applies both techniques to investigate MB-based EE of 96 rice farms in South Korea. The size of land, fertiliser consumption intensity, cost allocative efficiency, and the share of owned land out of total land are found to be correlated with MB-based EE. The results confirm the presence of a trade-off between MB-based EE and cost allocative efficiency and this finding, favouring policy interventions to help farms simultaneously achieve cost efficiency and MP-based EE.

Measuring economy-wide energy efficiency performance: A parametric frontier approach

This paper proposes a parametric frontier approach to estimating economy-wide energy efficiency performance from a production efficiency point of view. It uses the Shephard energy distance function to define an energy efficiency index and adopts the stochastic frontier analysis technique to estimate the index. A case study of measuring the economy-wide energy efficiency performance of a sample of OECD countries using the proposed approach is presented. It is found that the proposed parametric frontier approach has higher discriminating power in energy efficiency performance measurement compared to its nonparametric frontier counterparts.

How Not to Measure the Efficiency of Public Services (and How One Might)

SummaryThe single-input case of the ‘technical efficiency’ theory of M. J. Farrell is reformulated geometrically and algebraically. Its linear programming developments as ‘data envelopment analysis’ are critically reviewed, as are the related techniques of ‘stochastic frontier analysis’. The sense and realism of using data envelopment analysis or stochastic frontier analysis techniques, rather than some value-based method, for the assessment of police force efficiency are questioned with reference to the Spottiswoode report and related studies.