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European Review of Agricultural Economics Advance Access originally published online on September 18, 2007
European Review of Agricultural Economics 2007 34(3):393-416; doi:10.1093/erae/jbm023
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2007; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org

Estimating technical efficiency under unobserved heterogeneity with stochastic frontier models: application to northern German dairy farms

Awudu Abdulai and Hendrik Tietje

University of Kiel, Germany

Corresponding author: Awudu Abdulai, Department of Food Economics and Consumption Studies, University of Kiel, Olshausenstrasse 40, 24118 Kiel, Germany. E-mail: aabdula{at}food-econ.uni-kiel.de

Received June 2006; Revision received June 2007. This article uses panel data estimation techniques to examine technical efficiency of individual dairy farms in northern Germany. To the extent that agricultural production is characterised by heterogeneous production conditions, estimation techniques that do not account for unobserved heterogeneity produce biased efficiency estimates. We therefore estimate a number of conventional panel data models and Greene's recently proposed ‘true’ random-effects model, as well as an extension of the model to ascertain the effects of different specification on the production function and efficiency estimates. Our results appear to support theoretical expectations and previous findings according to which a specification that is both time-variant and also controls correlations between unobserved heterogeneity and the explanatory variables avoids heterogeneity bias and thus ensures consistent efficiency estimates.

Keywords: stochastic production frontiers, technical efficiency, panel data

JEL classification: Q12, D24


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