True Random Effects Research Articles

Enhancing Efficiency: Halton Draws in the Generalized True Random Effects Model

This paper measures the impact of the number of Halton draws in excess of ⌈n⌉ on technical efficiency in the generalized true random effects (four-component) stochastic frontier model estimated by simulated maximum likelihood. A substantial set of Monte Carlo simulations demonstrates that increasing the number of Halton draws to ⌈n3/4⌉ (⌈n2/3⌉) decreases the mean squared error of the total technical efficiency estimates by 6.1 (4.9) percent. Furthermore, increasing the number of Halton draws either improves or has no detrimental impact on correlation, mean squared error, relative bias, and upward bias for persistent, transient, and total technical efficiency. An energy sector application is included, to demonstrate how these issues can arise in practice, and how increasing Halton draws can improve parameter and efficiency estimates in empirical work.

Transient and Persistent Technical Efficiencies in Rice Farming: A Generalized True Random-Effects Model Approach

This study estimates transient and persistent technical efficiencies (TEs) using a generalized true random-effects (GTRE) model. We estimate the GTRE model using maximum likelihood and Bayesian estimation methods, then compare it to three simpler models nested within it to evaluate the robustness of our estimates. We use a panel data set of 945 observations collected from 344 rice farming households in Vietnam’s Mekong River Delta. The results indicate that the GTRE model is more appropriate than the restricted models for understanding heterogeneity and inefficiency in rice production. The mean estimate of overall technical efficiency is 0.71 on average, with transient rather than persistent inefficiency being the dominant component. This suggests that rice farmers could increase output substantially and would benefit from policies that pay more attention to addressing short-term inefficiency issues.

Accounting for technology heterogeneity in the measurement of persistent and transient inefficiency

This article tackles the problem of ignoring firm technology heterogeneity when measuring persistent and transient inefficiencies, which can lead to distorted estimates. Given that firms’ technologies exert a greater influence on long-run rather than short-run management, accounting for technology heterogeneity should prevent distortions in persistent inefficiencies and, to a lesser extent, in transient inefficiencies, which has been overlooked in the literature. Employing data from Dutch dairy farms spanning the years 2009 to 2016, I estimate random and fixed coefficients generalized true random effects models in a Bayesian framework, subsequently comparing the derived inefficiency scores. The findings indicate that average persistent inefficiency and its dispersion are inflated when technology heterogeneity is ignored, whilst transient inefficiency remains virtually unaffected. This finding is crucial to prevent firms and policy-makers from receiving misleading information about long-run performance metrics, whilst highlighting the need for future studies to account for technology heterogeneity when analyzing firms’ decisions.

Profit efficiency among kenyan maize farmers

The profit efficiency (PE) of maize farming and its determinants are estimated using the true random effect (TRE) approach. A survey of maize farmers was conducted in Uasin Gishu, one of Kenya's top maize-producing regions. Clearly, maize farmers can increase their profits based on the mean PE of 0.62. In terms of profitability, maize farming is elastically affected by the price of maize, but inelastically affected by the price of inputs. In households where the head of household is male, household sizes are larger, and farm sizes are larger, inefficiencies of profit are significantly reduced. Despite this, factors such as the distance between home and the maize farm, soil characteristics, maize diseases, along with natural disasters significantly increase profit inefficiency. According to the findings of the study, maize prices are more effective targets for developing supportive policies than input prices. To significantly increase PE, farmers would benefit from programs designed to improve their production and management skills to preserve soil health and minimize damage caused by disease and natural disasters. Furthermore, increase in PE would be achieved by improving farm size through land-use policies.

A cross-country comparison of pig production systems performance: Evidence from EU countries

This study estimates and analyze the technical efficiency of pork farms from five EU countries. The Generalized True Random-effects (GTRE) model was used to differentiate between persistent and transitory technical efficiency. The results show that elasticities are robust to various specifications. Spanish farms show the highest average efficiency score. In Denmark, Germany, France, and Poland, the most significant opportunities for growth are found in transitional efficiency. The degree of productive specialization in the five countries has a positive impact in the efficiency. In Denmark, Germany, and France, persistent efficiency has a positive association with the fraction of paid labor.

Farming efficiency and environmental resource dependence: Evidence from panel data for rural Central Vietnam

AbstractFarming and natural resource extraction are the main livelihood strategies of the rural poor in developing countries. A better understanding of their relationship is needed to alleviate existing pressures on resources and to reduce poverty. To date, mainly monetary indicators have been used to measure environmental resource dependence. However, these are inadequate for poor people who consume rather than sell their environmental products. Therefore, we propose the Environmental Resource Dependence Index (ERDI) to better capture the multidimensionality of dependence. We analyse the relationship between farming efficiency and environmental resource dependence using a simultaneous equations model (SEM) and panel data for 2013, 2016 and 2017 from three rural provinces in Central Vietnam. Time‐variant farming efficiency is estimated using a stochastic frontier model (SFM) with true random effects and Mundlak's adjustment. Our results show that monetary measures underestimate the extent of dependency. Therefore, policymakers should be careful to correctly identify those who are dependent on the environment. In addition, the results suggest that improved farming efficiency reduces the dependence on environmental resources. At the same time, higher dependence does not have a significant effect on farming efficiency.

Is it worth subsidising the cultural sector? New insights from Italian theatre companies

We study the impact of public subsidies on the efficiency of performing arts through an empirical analysis of Italian theatres (including opera houses, permanent theatres, and theatre production companies), using an output-oriented approach. Firstly, we discuss the previous works on efficiency and its determinants in the presence of public subsidies. Secondly, the stochastic frontier analysis true random-effects model and the IV GMM second stage regressions are used together with a procedure to measure the marginal effects of subsidies. Our findings suggest that the impact of public funds on technical efficiency of the Italian theatrical firms is positive and significant. The elasticity of public subsidy on efficiency is smaller than one. However, the return on subsidies amounts to 87 on average. These returns vary between Italian performing arts sub-sectors, and are very high for theatre production companies, low for permanent theatres, and very low for opera houses. We also find that the technological progress is negative for the theatrical Italian sector and it leads to the decline in total factor productivity over time, providing empirical support to the presence of Baumol’s disease in the sector. Overall, since Italian theatres technical efficiency could be increased at least by 25–27%, policy makers could work on public incentives in such a way as to avoid that, due to asymmetric information between government and theatrical firms, subsidies are provided (and criticised) indiscriminately.

Gender and agricultural Productivity: Econometric evidence from Malawi, Tanzania, and Uganda

Agricultural productivity gaps between men and women have been widely documented in many sub-Saharan African countries. Fundamentally, though, we contend that women have the same inherent intellectual (and thus farm management) capabilities as men but are inhibited by local conditions that put them at a disadvantage. We, therefore, hypothesize that by controlling for observed socio-economic, geographic, and agro-ecological characteristics, gender related farm productivity gaps would fade. Drawing on the Living Standards Measurement Study–Integrated Surveys on Agriculture for Malawi, Tanzania, and Uganda, we first match on observables to select comparable plots managed by male and female farmers, then estimate correlated true random effects stochastic production frontiers, followed by a meta-frontier to examine total factor productivity (TFP) and benchmarked technical efficiency. At the core of our approach is controlling for systematic observed and unobserved heterogeneity that could bias the comparative analysis. Results are mixed, but they tend to support our hypothesis. In Malawi, where we find market imperfections favor female farmers, women are more efficient than are male farmers and they exhibit TFP performance parity. In contrast, Tanzanian and Ugandan labor market imperfections favor male farmers, as do efficiency and TFP performance estimates.

Foreign players, team production, and technical efficiency: Evidence from European soccer

AbstractAs on‐field success is nowadays the main objective of European soccer clubs, good management needs to extract the highest sport success from the squad talent at hand. Because teams differ in their quality, performance needs to be compared with the best practice of comparable units. One remarkable source of heterogeneity across teams is the squad composition, which can produce gains from diversity together with communication costs. The paper studies the efficiency in sporting performance of soccer teams, paying attention to how the number of foreign players relates to productive inefficiency. Using data for 146 teams in the top 5 European leagues during 10 seasons, we estimate a double heteroskedastic True Random Effects Stochastic Frontier team production function. We find that (i) the number of passes, ball recoveries, and shots from the penalty area improve team efficiency, and (ii) a higher number of foreign players increase inefficiency. Our findings suggest that gains from squad diversity might be offset by communication costs.

Technical inefficiency and firm behavior: A panel study of small and medium Japanese manufacturing firms

This study examines the technical inefficiency of small and medium Japanese manufacturing firms by using panel data from the Basic Survey on Small and Medium Enterprises (2009–2018). We estimate the stochastic frontier production function with four production factors (regular workers, nonregular workers, capital stock and materials) and calculate the technical inefficiency of individual firms by applying a true random effects model that can distinguish technical inefficiency from firm heterogeneity.We find that inefficient firms are smaller, rely more on nonregular workers, exhibit poorer firm performance, have a higher debt-asset ratio, pay a lower interest rate and are inactive in capital investment and R&D investment. We also find that inactive capital investment and a high debt-asset ratio are mainly responsible for causing technical inefficiency.

Public support for performing arts. Efficiency and productivity gains in eleven European countries

This paper investigates the importance of public cultural expenditure for the efficiency and productivity of the performing arts (PA) firms. To this aim, we estimate a translog production function using the stochastic frontier approach (SFA), and we obtain the estimates of both technical efficiency and its determinants for the PA firms in EU-11 countries over the period 2009–2017. The large panel data set enables the application of robust true random-effects SFA techniques, which control for noise, unobserved firms' heterogeneity and endogeneity of the inputs. Moreover, by estimating a production function, the characteristics of the production technology in the PA sector is also derived. The empirical results demonstrate that PA firms are technically inefficient, implying that the investigated firms could increase their artistic output between 32 and 42% and that decreasing returns to scale are prevalent, due to the presence of too many micro and large-scale firms in the European PA sector. In contrast to the seminal Baumol and Bowen's [5] paper, we also demonstrate that the total factor productivity (TFP) increased in the EU PA firms over the examined period. Technical efficiency, although relatively low, was the main driver of this productivity growth, as opposed to scale efficiency change or technological change, which display very small or no increases. We also find that, contrary to the common wisdom on its negative effects on firm efficiency, public spending on culture increases the efficiency of PA firms. Within this context some policy implications are discussed.

Exploring the seasonal yield variability, production risk and efficiency: the case of rice farms in Bangladesh

Farmers in developing countries face different rice production risks, influencing yield variability. This study investigates the technical efficiency (TE) and production risk of Boro and Aman rice in Bangladesh. A stochastic production frontier has been used assuming a true random effect (TRE) model with flexible risk properties using two-year seasonal plot-level panel data of 5088 observations for Boro rice and 5638 observation for Aman rice. The empirical result of the risk model shows that labor, fertilizer, seed, and farm capital have a significant risk-decreasing effect for Boro rice. In contrast, the cultivated area of rice and average mean temperature have a significant risk-increasing effect on Boro rice. Labor and pesticide have significant risk-decreasing effects, whereas cultivated area, fertilizer and seed has a significant risk-increasing effect on Aman rice production. The average TE was 76% and 72% for Boro and Aman rice, respectively. Results suggest a high degree of variability in TE estimates, and the average farmer could increase rice yield by 24% and 28% by improving technical management without increasing the existing inputs. Large farms are more technically efficient than other farm categories. It is also observed that small farms and medium farms significantly decrease technical efficiency for Boro rice while significantly increasing for Aman rice. Moreover, technical efficiency declined over time for Boro rice, while it improved for Aman rice in Bangladesh. Production risk, however, declined over time for both Boro and Aman rice.

Estimating technical efficiency in the presence of farm heterogeneity: evidence from maize production in Ethiopia

PurposeThe purpose of this paper is to measure technical efficiency and examine its determinants while disentangling unobserved time-invariant heterogeneity from actual inefficiency using comprehensive household-level panel data.Design/methodology/approachThis paper estimates technical efficiency based on the true random-effects stochastic production frontier estimator with a Mundlak adjustment. By utilising comprehensive panel data with 4,694 observations from 39 districts of four major maize-producing regions in Ethiopia, the author measures technical efficiency and examine its determinants while disentangling unobserved time-invariant heterogeneity from technical inefficiency. By using competing stochastic production frontier estimators, the author provides insights into the influence of farm heterogeneity on measuring farm efficiency and the subsequent impact on the ranking of farmers based on their efficiency scores.FindingsThe study results indicate that ignoring unobservable farmer heterogeneity leads to a downwards bias of technical efficiency estimates with a consequent effect on the ranking of farmers based on their efficiency scores. The mean technical efficiency score implied that about a 34% increase in maize productivity can be achieved with the current input use and technology in Ethiopia. The key determinants of the technical inefficiency of maize farmers are the age, gender and formal education level of the household head, household size, income, livestock ownership, and participation in off-farm activities.Research limitations/implicationsWhile the findings of this study are critical for informing policy on improving agricultural production and productivity, a few important things are worth considering in terms of the generalisability of the findings. First, the study relied on secondary data, so only a snapshot of environmental factors was accounted for in the empirical estimations. Second, there could be other sources of unmeasured potential sources of heterogeneity caused by persistent technical inefficiency and endogeneity of inputs. Third, the study is limited to one country. Therefore, future research should extend the analysis to ensure the generalisability of the empirical findings regarding the extent to which unmeasured potential sources of heterogeneity caused by persistent technical inefficiency, endogeneity of inputs and other unobservable country-specific features – such as geographical differences.Originality/valueThis paper contributes to the literature on agricultural productivity and efficiency by providing new evidence on the influence of unobservable heterogeneity in a farm efficiency analysis. While agricultural production is characterised by heterogeneous production conditions, the influence of unobservable farm heterogeneity has generally been ignored in technical efficiency estimations, particularly in the context of smallholder farming. The value of this paper comes from disentailing producer-specific random heterogeneity from the actual inefficiency.

Can Increase in Productive Efficiency Mitigate Climate Impact on Agriculture in the South Asian Region?

South Asia is still a predominantly agrarian society, where a majority of the population is dependent on agriculture for their livelihoods. Rural poverty is higher than urban poverty, reflecting the heavy dependence on natural resources that are directly influenced by changes in weather and climate. The majority of South Asian agriculture is still based on a rain-fed system and is directly affected by climate change. The impacts of climate change on food production and food security in South Asia will vary by country, with many countries experience a decline in productivity. This paper examines the impact of climate change on agricultural production and the role of efficiency increment as an adaptation strategy for climate change in South Asia. First, a stochastic production frontier was estimated for South Asian agriculture. Then the climate change impact on agricultural production was predicted for 2050 using the estimated frontier. Finally, this paper assessed whether improvements in technical efficiency can offset the effect of climate change in this region. For this, a true random effect stochastic frontier with an exponentially distributed time varying inefficiency model was estimated. For this analysis, secondary data from the World Bank, Food and Agriculture Organization (FAO) and International Labour Organization (ILO) were used. Output of gross production values were calculated using agricultural land use, pesticide use, total labour use, total fertilizer use data with climate normals pertaining to eight countries in the south Asian region were collected from 1991 to 2017. The results indicate that with the expected climate change by 2050, Bhutan, Nepal and Pakistan will have a positive impact on their agricultural production while Bangladesh, India, Maldives and Sri Lanka will have a negative impact on their production. Overall technical efficiency of agricultural production in South Asia is 75.12% while individual countries show varying levels of technical efficiency, viz., Bangladesh 69.41% Bhutan 85.64%, India 71.83%, Maldives 44.91%, Nepal 82.78%, Pakistan 85.68%, and Sri Lanka 75.89% of efficiency. Prediction using the estimated model and efficiencies show that the negative impacts of climate change could be mitigated if these countries try to increase their levels of productive efficiencies such as following dissemination of technology, crop protection, training and development strategies, crop insurances to increase agriculture production.
 Keywords: Panel data, South Asia, Stochastic frontier analysis, Technical efficiency, True random effect

Persistent and transient efficiency of the chemical fertilizer firms in China: Does ownership matter?

AbstractThe chemical fertilizer industry has made great contributions to China's food security. Existing studies mainly focus on evaluating fertilizer use efficiency at the farm level whereas little is known about the technical efficiency of Chinese firms producing fertilizer. Based on the Chinese Industrial Enterprise Database (CIED) and the Generalized True Random Effects model (GTRE), this paper estimates and decomposes the technical efficiency of Chinese fertilizer‐producing firms. Results show technical efficiency increased from 0.883 in 1998 to 0.930 in 2007, with an average of 0.898. The growth rate of persistent efficiency is lower than that of transient efficiency, implying structural problems exist in the Chinese fertilizer industry. Moreover, ownership type and firms' entry and exit are exogenous determinants of technical inefficiency. State‐owned firms perform much worse on technical efficiency. The entry of efficient firms and exit of inefficient firms, especially the exit of inefficient state‐owned firms, have improved the technical efficiency significantly.

Persistent inefficiency, transient inefficiency and firm unobserved heterogeneity: a comparison of two frontier approaches using simulated and real data

PurposeRecent advances in stochastic frontier analysis (SFA) suggest two alternative approaches to account for unobserved heterogeneity and to distinguish between persistent and transient inefficiency. The first approach is the generalized true random effects (GTRE) model, and the second approach is an autoregressive inefficiency (ARI) model. This study compares them to highlight whether they capture similar inefficiency aspects.Design/methodology/approachUsing recent methodological advances in SFA, the authors estimate the GTRE and the ARI models using a Monte Carlo experiment and two real datasets from two industries (banking and agriculture).FindingsThe authors find that the two models provide quite different results in terms of inefficiency persistence and overall inefficiency (combination of transient and persistent inefficiency), regardless of the dataset considered.Practical implicationsThe study findings suggest that researchers should be careful when referring to these two models because they do not capture the same inefficiency aspects, even though they have the same conceptual basis. This work is a warning about the empirical aspects of the persistent and transient efficiency framework, in order to convey a consistent story to the reader on firms' performance.Originality/valueEven though they are used in a large number of studies, the present paper contributes to the productivity and efficiency literature by providing the first comparison of the GTRE and the ARI models.

Technical efficiency and firm heterogeneity in stochastic frontier models: application to smallholder maize farms in Ethiopia

This study estimates the technical efficiency measures of maize producing farm households in Ethiopia using stochastic frontier (SF) panel models that take different approaches to model firm heterogeneity. The efficiency measures are found to vary depending on how the estimation model treats both unobserved and observed firm heterogeneity. Estimates from the ‘true’ random effects (TRE) models that treat firm effects as heterogeneity are found to be identical to those from pooled SF models. Those results differ from the ones generated from the basic random effects (RE) models that treat firm effects as part of overall technical inefficiency. The more flexible generalised ‘true’ random effects (GTRE) model that splits the error term into firm effects, persistent inefficiency, transient inefficiency, and a random noise component indicates the presence of higher levels of persistent inefficiency than transient inefficiency. The basic truncated-normal RE model and heteroscedastic RE model yields similar efficiency estimates. The GTRE model predict persistent efficiency measures similar to those from the basic RE and flexible RE model with environmental variables incorporated in the variance function as well as in the deterministic production frontier. These results imply that the RE and GTRE panel models provide reliable efficiency estimates for our data compared to the TRE models. All the estimated SF models generate comparable production function parameters in terms of magnitude and sign. Overall, the results underscore the importance of scrutinising stochastic frontier models for their reliability of analytical results before drawing policy inferences.

Productivity change and efficiency in the Swiss nursing home industry

ABSTRACT Enhancing nursing home efficiency and productivity is a challenging task for health policy makers due to population ageing trends and increasing healthcare costs. In this study, we analyse nursing home efficiency and productivity using data from the universe of Swiss nursing homes for the period 2007–2015. We estimate a translog cost frontier via generalized true random effects models, which allow to disentangle the transient and the persistent components of inefficiency. In particular, we apply the simulated maximum likelihood approach proposed recently by scholars and then improve our estimates with a Mundlak correction. We find that total factor productivity change has dropped in recent years, and both efficiency components show scope for improvement. However, the marginal gains from transient efficiency measures are potentially larger, and could provide a more valid contribution to reverse the decreasing trend in total factor productivity change.

Technological Heterogeneity in Pig Farming: A Metafrontier Approach—Perspectives from Hungary and Poland

Despite remaining the most important type of animal production, pig production in Poland and Hungary declined after their accession to the European Union (EU) in 2004. This paper investigated the evolution of the technical efficiency of the pork industry in both countries. We applied stochastic frontier analysis, which takes into account heterogeneity in the production environment and production functions in both countries—true random effects, and a metafrontier model. We employed farm-level data from the Farm Accountancy Data Network sample during the period 2004–2015. Results illustrate the differences in production function in both countries and technological decline throughout the period of analysis. Furthermore, farms in Hungary were more technologically developed as well as less efficient in relation to the country frontier; however, the higher technological level resulted in generally greater efficiency in relation to the metafrontier. Our results suggest that different policy measures would be effective in the countries under analysis.

Productive efficiency and farm size in East Africa

ABSTRACT In this study, we undertake a comparative analysis to re-examine the inverse relationship hypothesis between farm size and land productivity, paying special attention to possible errors in land measurement and the role of technical efficiency (TE). Our primary focus is on the distribution of TE over farm size, so that we may assess the productivity and efficiency relationship with land that has been discussed extensively in the literature. We hypothesize that the distribution of TE over farm sizes is non-linear. To test our hypothesis, we use the Living Standards Measurement Study–Integrated Surveys on Agriculture and a stochastic production frontier with Greene’s (2005) true random effects framework. Specifically, we ask if smaller farms – within the range of farm sizes prevalent in Malawi, Tanzania, and Uganda – are more technically efficient than larger ones after accounting for a number of attributes often ignored such as measures of the production environment, including transportation infrastructure, public extension visits, among other characteristics. The results confirm a robust overall inverse relationship between farm size and land productivity in all three countries. However, the relationship between farm size and TE is positive across some size segments, resulting in a U-shape distribution.