Stochastic Frontier Framework Research Articles

Efficiency and productivity growth in US food manufacturing industries: Exporters, ownership changes, and firm characteristics

AbstractThis study employs a stochastic production frontier framework to measure productivity growth among exporters, non‐exporters, and firms experiencing ownership changes through mergers and acquisitions in US food manufacturing. Analyzing a panel data set that integrates Economic Censuses and transaction‐level exports, the results reveal the coexistence of more productive exporters, driven by technical efficiency, alongside less productive non‐exporters. Exporters in arm's length transactions show productivity growth driven by technical efficiency change, while those in related party transactions benefit mainly from technological change. Firms undergoing ownership changes exhibit positive productivity growth with a greater contribution from technical efficiency compared to those without such changes.

Productive Performance of Indian Food Manufacturing Industry: A Sub-Sectoral Analysis in a Stochastic Frontier Framework

This article examines the productive performance of the Indian food manufacturing industry measured in terms of technical efficiency (TE) of its 13 sub-sectors under the organised sector. For estimating their TE, it makes the use of the Cobb–Douglas production technology with the truncated normal distribution of stochastic inefficiency term ( Stevenson, 1980 ) via Jondrow et al. (1982) estimator of cross-sectional data. Data are sourced from the Annual Survey of Industries, 2017–2018. The results show that this industry, as a whole, observed 92% TE in 2017–2018, but among its sub-sectors, it varied between 100% and 74%, that is, they exhibited differential productive performance. Modern sub-sectors, such as fruits and vegetables, edible oils, bakery and beverage products, realised frontier-level efficiency, while sugar and starch products were identified as marginal performers in the industry. The robustness of the results is confirmed by the non-parametric estimates of TE from the data envelopment analysis. The results are expected to be useful in framing specific policies for these two different groups of food processors. In the case of sub-sectors performing below the frontier, policy actions aiming at pure technical and scale efficiencies, such as capacity building, research, skill programmes, and extension activities, need to be operationalised, while for sub-sectors performing at the frontier, only technological progress needs to be prioritised.

Estimating agriculture technologies’ impact on maize yield in rural South Africa

New technologies and digital infrastructures are enabling smart farming with high productivity levels across countries. Yet, there is dearth of evidence on how they are enabling smallholder farmers in Africa to increase their farm produce. By focussing on smallholder maize crop producers in South Africa and relying on a panel data for the period 2011–2021, this study applied a stochastic production frontier framework and Cobb–Douglas production function to estimate the relationship between variance of yield increase in relation to aggregate modern technologies adopted. The stochastic production frontier model was estimated using simple ordinary least square, maximum likelihood estimation and probit regressions. The analysis adopted a three-stage procedure which began with the specification of regression model, the calculation of least residuals squares of the explanatory variables and finally the estimation of the variances in the functional forms of output levels. The results revealed a positive relation between the application of digital agriculture technologies and increased crop performance for rural maize cultivators in South Africa. The policy inference from this study is that accelerating investment in digital agriculture infrastructure offers the promise of a quadruple return for South Africa’s agriculture sector.

The role of productivity and efficiency gains in the sugar-ethanol industry to reduce land expansion for sugarcane fields in Brazil

During the 2000s, the development of flex-fuel automotive vehicles in Brazil and rising international commodities prices allowed the Brazilian sugar-ethanol sector to grow at higher rates and expand area planted to sugarcane relative to levels verified in the 1990s. However, this land expansion increases the pressure on land-use change and management. This paper seeks to estimate the technical efficiency and decompose the total factor productivity (TFP) in the sugar-ethanol industry using a stochastic frontier framework. Primary data was obtained from an unbalanced panel of 90 sugar and ethanol producers for the harvest years from 2012/2013 to 2016/2017, providing 209 valid observations. Results suggest that mills have a small gap to increase their efficiency under the current technology, and the industry's TFP has been primarily impacted by the efficiency effects, on the other hand, SE mills might improve TFP rising their scale of production. Therefore, the results in this paper suggest that small SE mills may benefit from merging with other mills to explore economies of scale to enhance their TFP and strengthen economic competitiveness, contributing to the Brazilian environmental policy agenda.

Do carbon taxes affect economic and environmental efficiency? The case of British Columbia’s manufacturing plants

This paper evaluates the impact of British Columbia’s carbon tax on manufacturers’ economic and environmental performance in a unified modeling framework that allows for a critical distinction between efficiency, technical change, and total factor productivity as performance measures. In contrast to most papers that examine environmental policy impacts on either the economy or the environment, our approach combines a by-production model within a stochastic frontier framework to evaluate the tax’s impacts on both economic and environmental efficiency. Our findings suggest that a 1.0% increase in the carbon tax improved manufacturers’ efficiency in producing desirable output (real sales of manufactured goods) by 0.5%. In addition, the same 1.0% increase in the carbon tax improved manufacturers’ environmental efficiency for greenhouse gas (GHGs) and carbon monoxide (CO) emissions by the same amount, 0.2%. However, the carbon tax led to lower environmental efficiency for emissions of nitrogen oxides (NOX), −0.3%. In addition, our use of a rich plant-level dataset reveals considerable heterogeneity in manufacturers’ efficiency responses to the tax. Finally, we suggest that lower efficiency levels for undesirable outputs than desirable outputs indicate that the relative cost of adjusting production processes to improve efficiency favors economic efficiency over environmental efficiency.

Estimating the efficiency in overall energy consumption: Evidence from Slovenian household-level data

This study measures the efficiency of energy consumption in the residential sector in Slovenia. It extends the existing research on the estimation of electricity consumption efficiency by considering the consumption efficiency of multiple energy sources used in households. The detailed disaggregated data from two cross-sectional surveys conducted in the years 2010 and 2014, resulting in a sample of 6882 Slovenian households, is used in the estimation. The study includes energy services in a stochastic frontier framework through a sub-vector Shephard energy input distance function. Several household characteristics are considered in the estimation of energy consumption to control for household heterogeneity. The results reveal that Slovenian households have substantial potential for energy savings, which can be achieved through the replacement of inefficient energy-using capital stock and changed behavioural patterns. Specifically, we found the average inefficiency of energy consumption in Slovenian households to be 25.1% in 2010 and 23.3% in 2014, indicating a slight improvement in residential energy efficiency in the observed period, which is also in line with the EU energy-efficiency targets.

Eco-efficiency estimation with quantile stochastic frontiers: Evidence from the United States

This paper based on quantile stochastic frontier framework constructs quantile eco-efficiency measures. Using the estimates from the quantile stochastic frontier, the eco-performance of the U.S. states for nitrogen oxides (NOX), carbon dioxide (CO2), and sulfur dioxide (SO2) emissions is evaluated. A decoupling analysis involving the evaluation of the nonsynchronous change among states' economic output and environmental degradation levels is also performed. The findings suggest that U.S. states have followed a decoupling process among their GDP and emission levels over the period 1990–2017. In addition, a quantile eco-productivity change estimator is presented alongside with its main components (i.e. quantile eco-technical change and quantile eco-efficiency change). Our findings suggest that over the examined period states’ eco-productivity levels have been improved driven both from their eco-technical and eco-efficiency change levels.

Exploring hospital efficiency within and between Italian regions: new empirical evidence

This paper investigates the efficiency of Italian hospitals and how their performances have changed over the years 2007–2016, characterized by the great economic recession and budget constraints. We apply the Benefit of Doubt (BoD) approach to determine a composite index that considers the multi-dimensionality of the hospital outcome to be used as main output in a metafrontier production function based on a stochastic frontier framework. The efficiency score distribution is then used to construct a Theil index in order to compare, over time, the inequality of the estimated efficiency between hospitals, both within and between regions. The main findings show that the primary source of inefficiency comes from managerial inefficiency especially for hospitals located in southern regions. A clear and persistent North-South gap in efficiency performances of hospitals has been found along with an increase in the inequality in terms of efficiency between the areas of the country mostly determined by between region inequality.

Does cooperative membership impact the yield and efficiency of smallholder farmers? Evidence from potato farmers in Mongolia

PurposeThe purpose of this paper is to examine the impact of agricultural cooperative membership on potato production and technical efficiency.Design/methodology/approachA combination of propensity score matching technique and sample selection stochastic frontier framework that addresses potential selection bias due to observable and unobservable attributes is used to estimate the effect of participation between cooperative members and non-members. Using a stochastic meta-frontier approach, the technical efficiency of farmers was estimated and compared.FindingsThe empirical results show that the effect of participation in agricultural cooperatives is associated with increased yield and technical efficiency. A comparison of group-specific frontiers indicates that cooperative members perform better than non-members. Cooperative membership decisions is significantly associated with household and farm characteristics (e.g. education, participation in off-farm work, total farmland, distance to market and geographic location).Practical implicationsThe findings of this study demonstrate that cooperative organisations can be an important tool to enhance the productivity and efficiency of smallholder farmers. Successful cooperative models together with training programs designed to enlighten farmers on the importance and tangible benefits of collective action should be used to enlarge participation in cooperative organisations. In addition, governments and development agencies should implement targeted investment and capacity building programs related to irrigation management, gender-sensitive awareness and development of the internal institutional mechanisms in cooperatives for the transfer of knowledge and mutual learning so that all members benefit from cooperatives.Originality/valueDespite the pervasive evidence of the impact of cooperatives on productivity and technical efficiency in the Asian region, this study is probably the first attempt in the crop sector in Mongolia. It provides a rigorous empirical analysis of the impact of agricultural cooperative membership on potato production and technical efficiency through a counterfactual design.

Financial stability efficiency of Islamic and conventional banks

We examine the financial stability efficiency of Islamic and conventional banks. We employ a meta-frontier stability function approach based on stochastic frontier framework to estimate financial stability efficiency of both bank groups, drawing on a sample of Islamic and conventional banks from 28 countries over the period 2003–2018. Our study result shows that Islamic banks have 5.30% higher stability efficiency compared to conventional banks. This result is robust when we examine country-wise and geographical region-wise stability efficiency of Islamic and conventional banks.

Deregulation, technical efficiency and production risk in rice farming: evidence from Zhejiang Province, China

PurposeThe purpose of this paper is to evaluate the technical efficiency and production risk in China's rice production and examine the effect of factor market reform on these two agricultural performance metrics.Design/methodology/approachUsing an unbalanced farm-level panel data with 2,193 observations on 329 rice farms from 2004 to 2016, the authors estimate a translog stochastic production frontier model that accounts for both technical inefficiency and production risk. A one-step procedure through the maximum likelihood method that combines the stochastic production frontier, technical inefficiency and production risk functions is used to circumvent the bias problem often found in the conventional two-step model.FindingsEstimation results show that both land and labor market reforms significantly improved the level of technical efficiency over the years, although the effect of land market deregulation is of a much higher magnitude compared to the latter. The land market reform, however, has also increased the risk of production. The authors further find that a higher proportion of hired labor in total labor cost helps lower production risk, while also acting to decrease technical efficiency. Additionally, agricultural subsidies not only increased the output variability but also lowered technical efficiencyOriginality/valueFirst, the authors evaluate the effect of market deregulation on technical efficiency and production risk under a stochastic frontier framework that simultaneously accounts for both production performance metrics, which is important from a statistical point of view. Further, the authors exploit both cross-sectional and time-series variations in a panel setting to more accurately estimate the technical inefficiency scores and production risk for individual farmers, and investigate how the exogenous land and labor market reforms influence these two production performance measures in China's rice farming. This is the first study in the literature to analyze these questions under a panel framework.

Determinants of Food Security and Technical Efficiency among Agricultural Households in Nigeria

The challenge of food security in Nigeria hinges on several factors of which poor technical efficiency is key. Using a stochastic frontier framework, we estimated the technical efficiency of agricultural households in Nigeria and tested for the significance of mean technical efficiency of food-secure and food-insecure agricultural households. We further assessed the determinants of agricultural households’ inefficiencies within the stochastic frontier model and adopted a standard probit model to assess the determinants of households’ food security status. The results of our analyses revealed that; on the overall, the agricultural households had a mean technical efficiency of 52%, suggesting that agricultural households have the tendency of improving their technical efficiency by 48% using the available resource more efficiently. We found that households that are food-secure are more technically efficient than food in-secure households and this was significant at one-percent. Our results provide useful insights into the role of land size and number of assets as determinants of agricultural households’ food security and technical efficiency status.

Productivity change analysis in dairy farms following Polish accession to the EU – An output growth decomposition approach

The aim of this study was to assess changes in productivity of dairy farms after Poland’s accession to the European Union using a new decomposition of output growth within a stochastic frontier framework. We demonstrate how changes in economies of scale can be isolated, which leads to redefined components of output growth and a better measure of productivity growth. The productivity component is disaggregated to its three generic sources: total scale change, real technical change and efficiency change. An analysis of 1191 dairy farms based on data from 2004 to 2011 reveals that production growth (3.91%) is mostly due to input accumulation (3.4%) rather than productivity growth (0.51%.). Further decomposition indicates that the productivity component is driven by real technical growth (1%) and changes in scale elasticity, which had a negative effect on productivity (−0.81%). Conversely, technical efficiency growth (0.36%) played a minor role.

Modelling regional productivity performance across Western Europe

ABSTRACTThis study investigates the potential role of variations in technical efficiency as a contributing factor in providing an explanation for convergence or divergence in Western Europe. To control for spatial dependence among regions, it uses a spatial stochastic frontier framework that integrates spatial econometric techniques with stochastic frontier panel-data models. The empirical analysis reveals there is a strong geographical pattern of regional efficiency, while the degree of average regional efficiency has increased steadily year by year. From a European regional policy perspective, we can conclude that differentiated development strategies seem more appropriate than homogeneous or best-practice investment approaches.

Freedom, competition and bank efficiency in Sub-Saharan Africa

PurposeThis study aims to consider the effect of financial (banking) freedom and competition on bank efficiency.Design/methodology/approachWith data from 11 Sub-Saharan African countries over the period 2006-2012, the study estimates both competition (market power) and bank cost efficiency using the same stochastic frontier framework. Subsequently, Tobit models, including instrumental variable Tobit regression, are used to assess how financial freedom affects the relationship between competition and bank efficiency.FindingsThe results show that increase in market power (less competition) leads to greater bank cost efficiency, but the effect is weaker with higher levels of financial freedom. This is not consistent with the quiet life hypothesis.Practical implicationsPolicymakers usually take the view that opening up banking markets to greater competition may lead to higher efficiency. However, the results have shown that allowing banks to maintain some level of market power may be necessary to ensure banking system efficiency.Originality/valueThis study deepens the understanding of the inconsistent relationship between competition and bank efficiency, by using the same framework to measure both competition and efficiency, and by providing new empirical evidence on how the level of financial freedom affects this relationship.

Yield gaps in Dutch arable farming systems: Analysis at crop and crop rotation level

Arable farming systems in the Netherlands are characterized by crop rotations in which potato, sugar beet, spring onion, winter wheat and spring barley are the most important crops. The objectives of this study were to decompose crop yield gaps within such rotations into efficiency, resource and technology yield gaps and to explain those yield gaps based on observed cropping frequencies and alternative farmers' objectives. Data from specialized Dutch arable farms between 2008 and 2012 were used. Production frontiers and efficiency yield gaps were estimated using the stochastic frontier framework. The resource yield gap was quantified through the estimation of highest farmers' yields (YHF, average across farms with actual yields above the 90th percentile). Crop model simulations and variety trials were compiled to assess climatic potential yields (Yp) and technology yield gaps. The contribution of crop area shares and farmers' objectives to actual yields were assessed using regression analysis and based on five different farm level indicators (N production, energy production, gross margin, nitrogen-use efficiency and labour use), respectively.The average yield gap per crop (as percentage of Yp which is given in parentheses) was: 29.2% (of 72.6t ha−1) for ware potato, 39.7% (of 71.6t ha−1) for starch potato, 26.4% (of 107.1t ha−1) for sugar beet, 32.3% (of 88.3t ha−1) for spring onion, 25.2% (of 12.3t ha−1) for winter wheat and 37.5% (of 10.4t ha−1) for spring barley. The efficiency yield gap ranged between 6.6% (starch potato) and 18.1% (spring onion) of Yp. The resource yield gap was lower than 10% of Yp for all the crops and the technology yield gap ranged between 7.1% (ware potato) and 30.7% of Yp (starch potato). There were statistically significant effects of potato (positive quadratic) and onion (positive) area shares on ware potato, sugar beet and winter wheat yields, of sugar beet area share (positive quadratic) on winter wheat yield and of cereal area share (negative) on sugar beet and winter wheat yields. Farmers' objectives explain part of the variability observed in crop yields which were 7–24%, 13–24% and 12–32% lower than YHF, respectively, for gross margin maximising, labour minimising and N use efficiency maximising farms. In addition, there was a significant positive relationship between gross margin and the yield of ware potato, sugar beet and winter wheat. By contrast, no significant relationships were found between crop yields and NUE or labour use.We conclude that most of the yield gap is explained by the efficiency yield gap for ware potato and spring onion and by both the efficiency and technology yield gaps for sugar beet and cereals. The resource yield gap explains most of the yield gap of seed potato, and the technology yield gap of starch potato. The results regarding the effects of cropping frequency and crop rotations to crop yields are not very conclusive which suggest that agronomic principles become less evident at ‘systems level’ given the number of interacting factors at crop rotation level. Finally, although N and energy production are lower for gross margin maximising farms, most crop yields are not significantly different between farms with the highest N and energy production compared to farms performing best on economic (gross margin) objectives.

Technology invention and adoption in residential energy consumption: A stochastic frontier approach

In this paper we analyse the electricity consumption of a set of four traditional ‘white goods’ in a panel of ten EU countries observed over the period 1995–2013 with the aim of disentangling the amount of technical efficiency from overall energy saving using a stochastic frontier approach. The efficiency trend is modelled as a function of energy efficiency policies and innovation dynamics that combines invention and adoption processes using specific patents weighted by granular production data and worldwide bilateral import flows. Our model also accounts for potential endogeneity arising when innovation processes and economic growth are considered. With this replicable approach, the stochastic frontier framework allows for explicit modelling of innovation processes. Our results show that the efficiency component is related to changes in the energy efficient technological content of appliances. The ‘international’ component represents a predominant share of technological advancement and exerts a significant influence on the transient efficiency. Our evidence calls for an active role to be played by policy makers in focusing on innovation and trade policies in order to achieve more ambitious energy efficiency targets.

Factors Influencing Adoption, Productivity and Efficiency of Hybrid Rice in Bangladesh

Development and dissemination of hybrid rice technology can be one of the key strategies to meet growing demand for staple food in Bangladesh. A number of initiatives for hybrid rice research and development have been undertaken for the last couple of decades, but the adoption rate of hybrid rice is not encouraging. In recent years, although some studies have investigated the underlying socio-economic factors of hybrid rice adoption, research on estimating production efficiency of hybrid rice is relatively few. In addition, there is a bias in sample selection inherent in most of the technology adoption studies because rational farmers will always choose between hybrid and inbred rice depending on a host of price and non-price factors. Furthermore, the production function that uses observations from a single variety only may produce biased estimates of production efficiency. Given this backdrop, this paper adopted the recently developed method that corrects for sample selection bias in a stochastic frontier framework and simultaneously identifies the determinants of hybrid rice adoption and its farm-level productivity and efficiency while relaxing the assumption of perfect efficiency of the individual producers. A survey was conducted to collect primary data on inputs and outputs of hybrid and inbred rice production. Some key information on the socio-economic characteristics of the sample farmers was also collected. Using pre-tested structured questionnaire, a total of 336 and 180 rice farmers were selected and interviewed at six districts of Bangladesh for the crop year 2004 and 2005, respectively. Model diagnostics reveal that serious selection bias exists, justifying use of our sample selection approach. The results reveal that the producer's decision to choose hybrid rice is positively influenced by gross return per unit of land but negatively affected by a rise in relative prices of labour and phosphate fertilizer. Adoption of hybrid rice is significantly higher for pesticide and organic manure users. Land, irrigation and mechanical power are the significant determinants of hybrid rice productivity. Productivity of hybrid rice varies across regions. The mean technical efficiency of the hybrid rice producers is estimated at 0.86 with a range of 0.55 to 0.97, implying substantial scope to improve production by eliminating inefficiency. Policy implications include price policies to improve hybrid rice price, tenurial reform aimed at consolidating farm size and smooth operation of the mechanical power services and investment in irrigation to expand hybrid rice adoption and productivity in Bangladesh.

Estimating cost efficiency of Turkish commercial banks under unobserved heterogeneity with stochastic frontier models

This study aims to investigate the cost efficiency of Turkish commercial banks over the restructuring period of the Turkish banking system, which coincides with the 2008 financial global crisis and the 2010 European sovereign debt crisis. To this end, within the stochastic frontier framework, we employ true fixed effects model, where the unobserved bank heterogeneity is integrated in the inefficiency distribution at a mean level. To select the cost function with the most appropriate inefficiency correlates, we first adopt a search algorithm and then utilize the model averaging approach to verify that our results are not exposed to model selection bias. Overall, our empirical results reveal that cost efficiencies of Turkish banks have improved over time, with the effects of the 2008 and 2010 crises remaining rather limited. Furthermore, not only the cost efficiency scores but also impacts of the crises on those scores appear to vary with regard to bank size and ownership structure, in accordance with much of the existing literature.

A generalized stochastic production frontier analysis of technical efficiency of rice farming

Purpose This paper aims to analyze farm-level technical inefficiency of rice farming in Assam, India, using a multiple-output generalized stochastic frontier framework. Design/methodology/approach Primary data for this study were collected in 2009-2010 from 310 farm-households in four non-contiguous districts of Dhubri, Morigaon, Dibrugarh and Cachar that are located in different agro-climatic regions of Assam. Based on a Cobb–Douglas production function for multiple rice varieties, the paper simultaneously estimates the generalized stochastic production frontier and examines effects of exogenous factors on farm-level technical inefficiency. Findings Results of this study show that the average technical inefficiency of farms is 8.5 per cent in the sample. Further, inefficiency is lower in the frequently flood prone areas, and availability of government support helps reduce such inefficiency as well. However, technical efficiency is higher for the Muslim farm-households, and it decreases with greater land fragmentation. The study also finds that the use of primitive technology like bullock reduces technical efficiency of rice farming. Originality/value This paper is based on a novel data set that has specially been collected to examine productivity and efficiency of rice cultivation in the flood plains of Assam that has not been studied before. Further, to the best of the authors’ knowledge, this paper is the first one to model rice production as a multiple-output stochastic production frontier and analyze technical efficiency of rice production accordingly.