Estimating technical efficiency with non-neutral shift of the frontier

In the literature, technical efficiency is measured as the ratio of the observed output to potential output. Although there is no a priori theoretical reasoning, in the stochastic framework of measuring technical efficiency, potential output has been conventionally assumed as a neutral shift from observed output, owing solely to a larger intercept term in the frontier production function and without change in the input response coefficients. The objective of this paper is to propose and apply a method to measure technical efficiency without the above assumption. Furthermore, this methodology does not require the restrictive assumption of a particular distribution for the efficiency-related error term, as has been the case until now in the stochastic production function literature. A random sample of farmers from Madurai district in Tamil Nadu, India, was used. The analysis revealed substantial variation in the farm-specific input response coefficients between farms, which means that the contributions of individual inputs to the output differ from farm to farm, because the methods of application of the individual inputs vary. The frontier production function, which defines the potential of a technology, is determined by the highest values of the coefficients of each individual input which may come from one or more farms. Farm-specific frontier functions generally showed a considerable potential for improving the technical.performance of each input.