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Discipline of Operations Management and Econometrics

A Stochastic Production Frontier Model

Professor Sophia P. Dimelis, Athens University of Economics and Business

12th Nov 2010  11:00 am - Room 498, Merewether Building

In this paper we explore the idea that the Information and Communications Technologies (ICT) may have a contribution in reducing productive inefficiencies.  ICT is treated as a special type of technology and knowledge capital, the impact of which on production should be evaluated through the channel of technical efficiency. To implement this, we adopt the stochastic production frontier methodology for panel data. We follow the one-step procedure, as suggested in the recent literature, in which the technology parameters are estimated simultaneously with the parameters of the inefficiency equations, avoiding serious econometric problems involved with the two-step procedure initially employed (Schmidt and Sickles, 1984; Battese and Coelli, 1995; Coelli et al., 1999; Wang and Schmidt, 2002).
The model is implemented using a panel of 42 developed and developing countries in the period 1993-2001. The analysis is also performed focusing only on the OECD countries for which a longer data set was available (1990-2005). Strong evidence is provided for a significant impact of ICT in reducing country inefficiencies. Further evidence indicates a significantly positive ICT impact on labor productivity, while it seems that a substitute relationship between ICT and non ICT capital exists.
Based on the model’s estimates, the most efficient countries in the OECD group are the USA, Belgium and the Netherlands, while India and Argentina achieved the highest efficiency levels among the developing countries. Overall, developed countries operate closer into the world frontier. Several south European countries are less efficient and have not yet converged to the efficiency levels of the most developed OECD countries.