Allowing for inefficiency in parametric estimation of production functions for urban transit firms

Efficient versus inefficient observations are first identified and evaluated numerically by the nonparametric free disposal hull (FDH) method. Next, parametric production frontiers are obtained by means of estimating translog production functions through OLS applied to the subset of efficient observations only. Technical progress is included at both stages. Monthly data from three urban transit firms in Belgium, to which this two-stage technique is applied, show widely varying degrees of efficiency over time and across firms, and much less technical progress than standard (i.e., non frontier) econometric estimates suggest.