Frontier production functions: Improved procedures for estimation and application (original) (raw)
Scope and purpose-There is a great deal of current interest in the topic of industrial productivity. Traditional productivity measures which focus on output per man-hour of labor are considered inadequate because they ignore the contributions of energy, capital and raw materials to the production process. A superior tool for measuring industrial productivity is the frontier production function. It is the locus of the maximum output attainable from given amounts of inputs under existing technology. Deviations of observations from this locus can be used to measure the technical efficiency of the observations relative to the technically efficient observations which form the locus. This paper develops improved procedures for estimating the parameters of frontier functions and for identifying technically efficient observations. It also introduces a method for clustering observations on the basis of qualitative considerations prior to the estimation procedure. The goal of this research is to widen the applicability of these methods of measuring productivity and to reduce the computational burden associated with using them.
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