Title

Parametric Estimation of a Gauge Function and a Measure of Technical Efficiency

Campus

Oconee

Publication date

8-12-2021

Publisher

Emerald Group Publishing Limited

Book or Journal Information

Journal of Economic Studies, 48(6), 1145-1161

Keywords

Variables, Profit maximization, Metal workers, Information technology, Authors, Profits, Efficiency, Bias

Abstract

Purpose

This paper proposes the use of a gauge function as a measure of technical efficiency. The measure of technical inefficiency from a gauge function is desirable as the estimation of a gauge function is not subject to the endogeneity problem under the behavioral assumption of profit maximization in the competitive market.

Design/methodology/approach

The authors address three important properties of a gauge function, i.e. linear homogeneity, monotonicity and convexity in inputs and outputs, and show how such properties are utilized in its estimation. Then, the authors apply the estimation of a gauge function to US Blacksmiths in 1850 and 1880 to show that a failure to satisfy such properties may lead to an incorrect inference on the technical efficiency.

Findings

The authors find that the Blacksmiths in the 1850s were technically more efficient than the ones in the 1880s, indicating technical regress in Blacksmithing when the properties are satisfied.

Originality/value

This paper introduces a measure of technical inefficiency from a gauge function and shows how to estimate the gauge function parametrically for the measure. The authors show McFadden's gauge function and its properties, which differ from the properties of other distance functions. The authors emphasize linear homogeneity as well as monotonicity and convexity in inputs and outputs, which must be satisfied in the estimation of a gauge function.

Author Biography

Dr. Han has been teaching at the University of North Georgia for the last several years and brings application and context to the classroom from his experience as an Economist at the Bank of Korea, the central bank in Korea. He earned his Ph.D. in Economics from University of Georgia. The Munford Professorship was awarded to Dr. Han from UNG in 2014.

Share

COinS
 

Parametric Estimation of a Gauge Function and a Measure of Technical Efficiency

Purpose

This paper proposes the use of a gauge function as a measure of technical efficiency. The measure of technical inefficiency from a gauge function is desirable as the estimation of a gauge function is not subject to the endogeneity problem under the behavioral assumption of profit maximization in the competitive market.

Design/methodology/approach

The authors address three important properties of a gauge function, i.e. linear homogeneity, monotonicity and convexity in inputs and outputs, and show how such properties are utilized in its estimation. Then, the authors apply the estimation of a gauge function to US Blacksmiths in 1850 and 1880 to show that a failure to satisfy such properties may lead to an incorrect inference on the technical efficiency.

Findings

The authors find that the Blacksmiths in the 1850s were technically more efficient than the ones in the 1880s, indicating technical regress in Blacksmithing when the properties are satisfied.

Originality/value

This paper introduces a measure of technical inefficiency from a gauge function and shows how to estimate the gauge function parametrically for the measure. The authors show McFadden's gauge function and its properties, which differ from the properties of other distance functions. The authors emphasize linear homogeneity as well as monotonicity and convexity in inputs and outputs, which must be satisfied in the estimation of a gauge function.