Divergency between average and frontier production technologies: an empirical investigation for Bangladesh

Applied economic analysis and policy formation often relies on esttimated porduction technologies. Primal representations of production technologies can be specified as the average production function or as the stochastic frontier. This paper uses nested and non-nested specification tests and assessment of economic variables, including elasticities and marginal products, to evaluate systematic differences between the average production function and three different specifications of the stochastic frontier. Bangladesh serves as an illustrative example. The importance emerges of first beginning any analysis of production technologies with nested hypothesis testing of inefficiency and non-nested hypothesis testing for systematic but unknown differrences between the average and stochastic frontier functions followed by nested testing of the final form of the production technology.