Estimation of Technical Inefficiencies with Heterogeneous Technologies

This paper considers the measurement of firm's specific (in)efficiency while allows for the possible heterogeneous technologies adopted by different firms. A flexible stochastic frontier model with random coefficients is proposed to distinguish technical inefficiency from technological differences across firms. Posterior inference of the model is made possible via the simulation-based approach, namely, Markov chain Monte Carlo method. The model is applied to a real data set which has also been considered in Christensen and Greene (1976), Greene (1990), Tsionas (2002), among others. Empirical results show that the regression coefficients can vary across firms, indicating the adoption of heterogeneous technologies by different firms. More importantly, we find that, without considering this possible heterogeneity, the inefficiency of firms can be over-estimated.