Parametric Approach for Estimation of Technical Efficiency

Abstract: In this paper an attempt is made to explain the basic concept of efficiency, frontier production function, technical efficiency, deterministic frontier, and stochastic frontier. Efficiency of a firm/industry refers to its performance in the utilization of resources at its disposal and is a relative concept. Technical efficiency of a production function is defined as the maximum quantity of output obtainable from given set of inputs. A failure to produce the greatest possible output means the technical decision is in efficient. Technical inefficiency can be obtained by the methods stochastic and deterministic production frontier models. The method discussed in this paper has several possible extension and generalization. Technical efficiency has many policy implications in various functional areas of modern management. such that the points, defined by the input-per-unit-of-output ratios, ( /Y, /Y), are above the curve. The unit isoquant defines the input-per-unit-of-output ratios associated with the most efficient use of the inputs to produce the output involved. The deviation of observed input-per-unit-of-output ratios from the unit isoquant was considered to be associated with technical inefficiency of the firms involved. The ratio, OB/OA, is defined to be the technical efficiency of the firm with input-per-unit-of-output values at point A.