Review on Parametric and Nonparametric Methods of Efficiency Analysis

Efficiency analysis using parametric and nonparametric methods have monopolized the recent literature of efficiency measurement. However, the choice of estimation method has been an issue of debate. This review was aimed to: provide information on the concepts, types and methods of applying parametric and nonparametric methods of efficiency analysis and review on the advantages and disadvantages of the two methods of efficiency analysis. Parametric methods of efficiency analysis have significant advantages by distinguishing and modeling the random noise from inefficiency. However, this method requires specification of the model and separating random noise from the true in efficiency may be restrictive in most cases. On the other hand, the nonparametric method has the potential to impose axiomatic properties and estimate the frontier nonparametrically.