JOB MARKET PAPER

Minegishi, Kota (2014), "A Difference in Distance-Functions (DDF) Approach to Production Heterogeneity: Application to Technical Change Measurement,” AREC, University of Maryland, College Park, January.

 

Abstract:  This paper proposes a new approach to attributing observed production heterogeneity to the shift of a technological frontier (i.e. technical change) and the shift of technical efficiency (i.e. technical efficiency change) by extending the method of Malmquist Productivity Index (MPI) decomposition into a regression framework. The method, named Difference in Distance-Functions (DDF) approach, obtains decomposition measures at the sample level, allowing for these measures to be estimated from unbalanced panel data and to be identified while accounting for the influence of non-production factors. An empirical application using data on Maryland dairy operations during 1995-2009 finds an annual 0.60% MPI that decomposes into a 1.29\% expansion in the technological frontier and a 0.69% decline in the mean technical efficiency. Farm ownership and off-farm income are associated with 4.48% higher and 5.78% lower technical efficiency respectively. The second version of the TC measurement, derived from hypothetical technical efficiency assessments in the spirit of the standard MPI calculations as opposed to a typical econometric formulation, yields an annual technical change of 2.17%. Increases in summer rainfall, winter temperature, and summer temperature by one standard deviation suggest 3.18%, 3.23%, and -3.46% shifts in the technological frontier respectively. Among the alternative specifications considered in this study, the DDF approach appears to perform best.