Estimating Technical Efficiency Under Unobserved Heterogeneity with Stochastic Frontier Models: Application to Northern German Dairy Farms

Posted: 26 Jun 2008

See all articles by Awudu Abdulai

Awudu Abdulai

Consultative Group on International Agricultural Research (CGIAR); University of Kiel - Department of Food Economics and Consumption Studies

Hendrik Tietje

University of Kiel

Abstract

This article uses panel data estimation techniques to examine technical efficiency of individual dairy farms in northern Germany. To the extent that agricultural production is characterised by heterogeneous production conditions, estimation techniques that do not account for unobserved heterogeneity produce biased efficiency estimates. We therefore estimate a number of conventional panel data models and Greene's recently proposed true random-effects model, as well as an extension of the model to ascertain the effects of different specification on the production function and efficiency estimates. Our results appear to support theoretical expectations and previous findings according to which a specification that is both time-variant and also controls correlations between unobserved heterogeneity and the explanatory variables avoids heterogeneity bias and thus ensures consistent efficiency estimates.

Keywords: stochastic production frontiers, technical efficiency, panel data

JEL Classification: Q12, D24

Suggested Citation

Abdulai, Awudu and Tietje, Hendrik, Estimating Technical Efficiency Under Unobserved Heterogeneity with Stochastic Frontier Models: Application to Northern German Dairy Farms. European Review of Agricultural Economics, Vol. 34, No. 3, pp. 393-416, 2007, Available at SSRN: https://ssrn.com/abstract=1151626 or http://dx.doi.org/jbm023

Awudu Abdulai (Contact Author)

Consultative Group on International Agricultural Research (CGIAR) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

University of Kiel - Department of Food Economics and Consumption Studies

Olshausenstrasse 40
24098 Kiel, 24098
Germany

Hendrik Tietje

University of Kiel

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

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