The potential determinants of German firms' technical efficiency: An application using industry level data

This paper explores the distribution of the technical efficiencies across German manufacturing industries and looks at the association of technical efficiency to other economic categories. Aggregating 1995 to 2001 firm-level data yields an unbalanced panel with 241 cross-sections (industries). While the unbalanced nature of the data precludes some time-varying specifications, one can estimate the parameters of a time-invariant fixed-effects model. With only one industry being fully efficient, the rest perform poorly, having an efficiency mode of .32. To account for outliers 7 industries were dropped from the sample (a 2.9% reduction of the sample). In the smaller sample, the estimated mode of technical efficiency is .78. The distribution of TE is only slightly positively skewed, contrary to the rationale for using a one-sided distribution for the efficiencies. This problem has been noticed by other researchers, and so far the only solution proposed has involved changing the assumed distribution for the technical efficiencies. However, since fixed-effects estimation does not assume a particular distribution for the firm level inefficiencies, our purified-of-outliers scores of technical efficiencies can be trusted and used as endogenous variable in further analysis.