A stochastic production frontier model with group-specific temporal variation in technical efficiency

The purpose of this study was to develop a stochastic frontier production model that relaxes the assumption of identical temporal patterns of technical inefficiency, and the restriction of specific forms of temporal pattern, without imposing other restrictions. Specifically, the proposed model allows group-specific patterns of temporal change in technical inefficiency. This is a direct generalization of the model of Lee and Schmidt (1993) [Lee, Y.H., Schmidt, P., 1993. A production frontier model with flexible temporal variation in technical inefficiency. In: Fried, H., Lovell, C.A.K., Schmidt, P. (Eds.), The Measurement of Productive Efficiency: Techniques and Applications. Oxford University Press, Oxford], which imposed an identical temporal pattern of technical inefficiency on all firms. When applied to Indonesian rice farms, the model is shown to be an improvement on the earlier model of Lee and Schmidt (1993), and the changes in the efficiency rankings of farms over time demonstrate the model’s flexibility.