PARAMETRIC MODELS FOR DYNAMIC EFFICIENCY MEASUREMENT

The efficiency measurement literature has been almost exclusively based on a static view of the firm. In this static context the optimality of decisions is measured against the best practice frontier in a period-by-period basis and without any connection along time. This dissertation departs from the techniques used by static models of efficiency measurement and accounts for the intertemporal nature of the decision-making process at the firm level. The cost associated with the adjustment of the stock of quasi-fixed production factors is identified as the link between current decisions and future production possibilities. The objective of the firm is assumed to be intertemporal cost minimization.Two parametric models for efficiency measurement are developed and estimated. The first model is based on the argument that when the adjustment of quasi-fixed factors is costly, dynamic optimization may prescribe a plan that would force a technically inefficient firm to remain partly inefficient in the short run. The implication of intertemporal cost minimization is that inefficiency in static models is likely to persist over time. This implication is incorporated to the techniques used for static efficiency measurement and estimation of a reduced-form model is proposed within the state-space modeling framework. The applicability of the model is illustrated using two panels of dairy farms from Germany and the Netherlands.The second model is centered around efficiency measurement with respect to capital stock. The firms managers are assumed to form rational expectations with respect to future prices and minimize the expected discounted cost of producing a given stream of output. Estimation is based on a system of equations consisting of the variable cost function, the cost-share equations and the derived Euler equations. A relatively new econometric technique is employed for the estimation which combines regression and factor analysis. The structural model is applied to a panel of food-processing plants from Mexico.