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.

     

Exploring customer heterogeneity with a scale-extended latent class choice model: Experimental evidence drawn from urban water users

The search for improved water pricing is central to urban water reform in many countries. Establishing efficient water prices is notoriously difficult, not least because different customers have different demands for water and yet they are presently faced with a one-size-fits-all approach to pricing and service. This is especially challenging where water availability fluctuates widely, as is the case in many parts of Australia, because the impacts of exposure to episodic periods of scarcity can differ markedly. There is now substantial interest in the notion of ‘unbundling’ the water product to provide a better fit between customers' preferences and the level of service received. Following this trend, this study provides important insights into householders' willingness to pay for a range of flexible water options using a choice experiment. The paper reports a relatively underemployed extension to the latent class modelling framework to investigate preference heterogeneity towards urban water products, including purchasing services that involve the provision of environmental and amenity outcomes. The work adds to studies that use choice data to reveal heterogeneity while improving our understanding of household customers' demands. Overall, it also brings into focus questions about the future management of water in urban contexts.