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Horrace paper on alternative technical efficiency measures published in Journal of Applied Econ

Feb 15, 2012

Alternative Technical Efficiency Measures: Skew, Bias and Scale

Qu Feng & William C. Horrace

Journal of Applied Econometrics, February 2012

William C. Horrace

William C. Horrace


In the fixed-effects stochastic frontier model an efficiency measure relative to the best firm in the sample is universally employed. This paper considers a new measure relative to the worst firm in the sample. The authors find that estimates of this measure have smaller bias than those of the traditional measure when the sample consists of many firms near the efficient frontier. Moreover, a two-sided measure relative to both the best and the worst firms is proposed. Simulations suggest that the new measures may be preferred depending on the skewness of the inefficiency distribution and the scale of efficiency differences.