Efficiency Measurement William Greene Stern School of Business New York University

Session 10 Summary

Inefficiency

Methodologies Data Envelopment Analysis Stochastic Frontier Modeling HUGE User base Largely atheoretical Applications in management, consulting, etc. Stochastic Frontier Modeling More theoretically based – “model” based More active technique development literature Equally large applications pool

SFA Models Normal – Half Normal Normal-Gamma Truncation Heteroscedasticity Heterogeneity in the distribution of ui Normal-Gamma Classical vs. Bayesian applications Flexible functional forms for inefficiency

Modeling Settings Production and Cost Models Multiple output models Cost functions Distance functions, profits and revenue functions

Modeling Issues How to handle observable heterogeneity – “where do we put the zs?” Panel data Is inefficiency time invariant? Separating heterogeneity from inefficiency Allocative inefficiency and the Greene problem

Range of Applications Regulated industries – railroads, electricity, public services Health care delivery – nursing homes, hospitals, health care systems (WHO) Banking and Finance Many other industries. See Lovell and Schmidt “Efficiency and Productivity” 27 page bibliography. Table of over 200 applications since 2000