Accounting for technology heterogeneity in the measurement of persistent and transient inefficiency

Abstract

This article tackles the problem of ignoring firm technology heterogeneity when measuring persistent and transient inefficiencies, which can lead to distorted estimates. Given that firms’ technologies exert a greater influence on long-run rather than short-run management, accounting for technology heterogeneity should prevent distortions in persistent inefficiencies and, to a lesser extent, in transient inefficiencies, which has been overlooked in the literature. Employing data from Dutch dairy farms spanning the years 2009 to 2016, I estimate random and fixed coefficients generalized true random effects models in a Bayesian framework, subsequently comparing the derived inefficiency scores. The findings indicate that average persistent inefficiency and its dispersion are inflated when technology heterogeneity is ignored, whilst transient inefficiency remains virtually unaffected. This finding is crucial to prevent firms and policy-makers from receiving misleading information about long-run performance metrics, whilst highlighting the need for future studies to account for technology heterogeneity when analyzing firms’ decisions.