Productivity growth and structural changes in a partially liberalised market: a distance function approach

The question of whether an industry experiencing rapid structural change will demonstrate productivity growth at the same time is unresolved. This paper uses a panel data sample of European airlines over the period of partial market liberalisation (1991–1995) to investigate whether productivity growth was affected in the immediate aftermath of this structural change. The empirical measurement in the paper is based on the comparison of a time-varying stochastic parametric distance function with conventional Data Envelopment Analysis (DEA). This function is used to generate a parametric stochastic estimate of the Malmquist productivity indices. The indices include a returns to scale effect to provide the proper total factor productivity indices. These are compared with the nonparametric estimates. The measures of productivity change are consistent across both methods, with efficiency change dominating technical change in the response to the third liberalisation package in the European airline industry.