Measuring efficiency in Greek manufacturing: an application using cost frontiers
1995
Farhat, H.
The frontier cost function is the minimum possible expenditure required to produce the maximum possible output with a given set of inputs. Inefficiency is the amount by which the observed cost exceeds the frontier cost. Using data concerning Greek manufacturing, we estimated the stochastic and the deterministic frontier cost function in order to evaluate the efficiency of this sector. Using the log linear Cobb-Douglas form we found: in the stochastic method the total efficiency is - on average - 81, indicating that the observed cost is 19 above the frontier (11 due to technical inefficiency and 8 due to allocative inefficiency); while in the deterministic method the average total inefficiency is 14 (9 due to technical inefficiency and 5 due to allocative inefficiency). Using the translog form, which we found to be better for modelling Greek technology the Cobb-Douglas form, we found: in the stochastic method the observed cost is - on average - 21 above the frontier due to technical inefficiency; while in the deterministic method the observed cost is - on average - 13.9 above the frontier, due to technical inefficiency. By comparing the deterministic and the stochastic methods, we found that the former gives percentages of efficiency mostly higher than the latter. The distribution of deterministic efficiency is almost normally distributed, and the variation in the level of efficiency across industries appears wide in the stochastic method
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