The Econometric Approach To Efficiency Analysis
Abstract As described in Chapter 1, two very distinct methods of estimating efficiency in production have developed in the literature. This chapter will survey the econometric approach and provide a summary of the received techniques. Little attempt will be made to survey the received empirical literature. Not only is the list already prohibitively large, but it continues to grow, partly with the latter chapters of this volume.1 Section 2.8 will present some estimates based on the U.S. airline industry in order to illustrate some of the basic, more accessible techniques.The literature on frontier production and cost functions and the calculation of efficiency measures begins with Farrell (1957). He suggested that we could usefully analyze technical efficiency in terms of realized deviations from an idealized, frontier isoquant. This approach falls naturally into an econometric approach in which the inefficiency is identified with disturbances in a regression model.