A Reduced-Form Model for Dynamic Efficiency Measurement: Application to Dairy Farms in Germany and The Netherlands

The stochastic distance function model is extended to allow for the inefficiency component of the error term to be autocorrelated, as implied by a dynamic model of firm behavior. The autocorrelation parameter can then be interpreted as a measure of the persistence of inefficiency. The model is viewed from a state-space perspective, and Kalman filtering techniques are proposed for estimation. The model is applied to two panels of dairy farms from Germany and the Netherlands. The results suggest a very high degree of persistence of inefficiency through time.