Productivity of Nations: A Stochastic Frontier Approach to TFP Decomposition

This paper tackles the problem of aggregate TFP measurement using stochastic frontier analysis. We estimate a world production frontier for a sample of 75 countries over a long period. The “Bauer-Kumbhakar” decomposition of TFP is applied to a smaller sample in order to evaluate the effects of changes in efficiency (technical and allocative), scale effects, and technical change. Estimated technical efficiency scores are compared to productivity indexes offered by nonfrontier studies. We conclude that differences in productivity are responsible for virtually all the differences of growth performance between developed and developing nations and that a large part of this is due to allocative efficiency.