Economic Efficiency and Frontier Techniques

Abstract

Abstract. Most of the literature related to the measurement of economic efficiency has based its analysis either on parametric or on non-parametric frontier methods. The choice of estimation method has been an issue of debate, with some researchers preferring the parametric and others the non-parametric approach. The aim of this paper is to provide a critical and detailed review of both core frontier methods. In our opinion, no approach is strictly preferable to any other. Moreover, a careful consideration of their main advantages and disadvantages, of the data set utilized, and of the intrinsic characteristics of the framework under analysis will help us in the correct implementation of these techniques. Recent developments in frontier techniques and economic efficiency measurement such as Bayesian techniques, bootstrapping, duality theory and the analysis of sampling asymptotic properties are also considered in this paper.

Evaluation of bank branch growth potential using data envelopment analysis

“…A careful consideration of the techniques, available data set and industry characteristics should be performed to find the most suitable method of analysis. [MURI04], [BERG97] Although most studies involving bank performance evaluation using frontier efficiency and Weill [WEIL04], which provide comparisons of parametric and non-parametric methodologies. Due to the inherent differences between the parametric and non-parametric methodologies, there were more inconsistencies found in these studies.…”

“…It follows that this approach should not be used when the model includes uncontrollable variables. [MURI04] Stochastic frontier approaches differ from deterministic approaches in that they incorporate a double-sided random error into the specification of the frontier model. This allows the specification errors and uncontrollable factors to be modeled independently of the technical inefficiency component.…”

“…This allows the specification errors and uncontrollable factors to be modeled independently of the technical inefficiency component. [MURI04] As with all modeling techniques, parametric methods offer some distinct advantages and disadvantages. The key advantage of the parametric models is that they allow for random error, thus reducing the chance of misidentifying error or confusing data as an inefficiency.…”

Application of Panel Data Models in Benchmarking Analysis of the Electricity Distribution Sector*

“…1 There exist a variety of methods for efficiency measurement. Kumbhakar and Lovell (2000), Coelli et al (2005) and Murillo-Zamorano (2004) provide extensive presentations of these methods. Many studies report discrepancies in individual efficiency estimates across different methods.…”

On the informativeness of persistence for evaluating mutual fund performance using partial frontiers

“…In contrast to what we might call traditional approaches to mutual fund evaluation, since the late 1990s interest has been growing in applying the so-called frontier techniques, both parametric and nonparametric (see Murillo-Zamorano, 2004, for a survey) to evaluate the performance of mutual funds. The number of proposals, both from theoretical and empirical points of view, is now substantial, including Murthi et al (1997), McMullen and Strong (1998), Morey and Morey (1999), Wilkens and Zhu (2001), Basso and Funari (2001), or Choi and Murthi (2001), among others.…”