Stochastic Efficiency Measurement: The Curse of Theoretical Consistency

Abstract

The availability of efficiency estimation software — freely distributed via the internet and relatively easy to use — recently inflated the number of corresponding applications. The resulting efficiency estimates are used without a critical assessment with respect to the literature on theoretical consistency, flexibility and the choice of the appropriate functional form. The robustness of policy suggestions based on inferences from efficiency measures nevertheless crucially depends on theoretically well-founded estimates. This paper adresses stochastic efficiency measurement by critically reviewing the theoretical consistency of recently published technical efficiency estimates. The results confirm the need for a posteriori checking the regularity of the estimated frontier by the researcher and, if necessary, the a priori imposition of the theoretical requirements.

JEL classification codes:

• C51
• D24
• Q12

Key words:

• functional form
• stochastic efficiency analysis
• theoretical consistency