Abstract
Estimating/predicting levels of efficiency involves estimating production frontiers. A widely-used estimation approach involves enveloping scatterplots of data points as tightly as possible without violating any assumptions that have been made about production technologies. Some of the most common assumptions lead to estimated frontiers that are comprised of multiple linear segments (or pieces). The associated frontiers are known as piecewise frontiers. This chapter explains how to estimate the unknown parameters of so-called piecewise frontier models (PFMs). It then explains how the estimated parameters can be used to analyse efficiency and productivity change. The focus is on data envelopment analysis (DEA) estimators.
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Notes
- 1.
- 2.
This estimation problem is obtained by replacing q and x in problem (6.15) with \(\rho q_{it}\) and \(\delta x_{it}\), then using the linear homogeneity properties of the aggregator functions to simplify. For example, the constraint \(X(\delta x_{it})=1\) implies that \(\delta = 1/X(x_{it})\), which in turn implies that \(\delta x_{it}=x_{it}/X(x_{it})\).
- 3.
In this context, ‘consistent’ means that the sampling distributions of the estimators collapse to the true levels of (in)efficiency as the numbers of firms used to estimate production frontiers become infinitely large.
- 4.
This formula is based on the result that if \(u_{it}\) is an independent exponential random variable with scale parameter \(\sigma _t >0\), then \(P[-\sigma _t \ln (1-\alpha /2)\le u_{it} \le -\sigma _t \ln (\alpha /2)]=1-\alpha \Rightarrow P[ (\alpha /2)^{\sigma _t} \le \exp (-u_{it}) \le (1-\alpha /2)^{\sigma _t}]=1-\alpha \).
- 5.
Consider an F distribution with the numerator degrees of freedom equal to the denominator degrees of freedom. A half-F distribution is such a distribution truncated from below at 1. The critical value that leaves an area of \(\alpha \) in the right-hand tail of a half-F distribution is the value that leaves an area of \(\alpha /2\) in the right-hand tail of the corresponding untruncated F distribution.
- 6.
Primal and dual indices are only proper indices if the parameters of distance, revenue and cost functions do not vary across observations. Except in restrictive special cases (e.g., there is only one input and one output, there is no environmental change, and production frontiers exhibit CRS), PFMs are underpinned by functions with parameters that do vary across observations.
- 7.
Additive TFPI numbers can also be computed using estimated representative normalised shadow prices as weights. The DPIN software of O’Donnell (2010a) computes so-called ‘Färe-Primont’ TFPI numbers in this way. If average estimated normalised shadow prices are proportional to average observed prices, then the associated additive index numbers are equal to Lowe index numbers.
- 8.
If average estimated shadow value shares are equal to average observed value shares, then the associated multiplicative index numbers are equal to geometric Young index numbers.
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O’Donnell, C.J. (2018). Piecewise Frontier Analysis. In: Productivity and Efficiency Analysis. Springer, Singapore. https://doi.org/10.1007/978-981-13-2984-5_6
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