Efficiency is a crucial factor in productivity growth and the optimal allocation of resources in the economy; therefore, measuring inefficiency is particularly important. This paper provides a comprehensive review of the latest developments in distance functions and the measurement of inefficiency within the stochastic frontier framework. Recent advances in several related areas are reviewed and evaluated, including various approaches to measuring inefficiency using distance functions, advancements in modeling inefficiency within the stochastic frontier framework, and the most common estimation techniques. A practical guide is provided on when these methods can be applied and how to implement them. The radial, hyperbolic, and directional measures of inefficiency are discussed and assessed. The development of modeling inefficiency concerning its temporal behavior, classification, and determinants is also examined. To ensure the use of appropriate estimation techniques, recent advancements in the most common estimation techniques are reviewed. This paper also addresses the importance of maintaining the theoretical regularity applied by neoclassical microeconomic theory when it is violated, as well as the econometric regularity when variables are non-stationary. Without regularity, inefficiency results can be extremely misleading. The paper discusses significant challenges related to estimation issues that must be managed in future applications. These challenges include the inaccurate choice of functional form, ignoring the possibility of heterogeneity and heteroskedasticity, and suffering from the endogeneity problem. The paper also examines various approaches to addressing these issues, as well as potentially productive areas for future research.

The study analyzes productive efficiency of crop farming in the EU. We use publicly available data on crop farming from FADN database. Standard efficiency measurement techniques based on frontier analysis indicate that the representative farms provided in the database are fully efficient, even though there is ample evidence in the literature that this is highly unlikely. We find that this is a consequence of overly restrictive assumptions about the compound error in standard SF models. The efficiency benchmark, based on the best model given data with generalized error specification, reveals substantial differences in crop farming efficiency in the EU.

We investigate the impact of five types of subsidies granted under the European Union Common Agricultural Policy on the persistent and transient inefficiency of Polish dairy farms. Our research shows that coupled and environmental subsidies reduce transient technical inefficiency, while the opposite is true for Less Favoured Areas (LFA) and other rural subsidies. Simultaneously, environmental, LFA, and other rural subsidies increase persistent technical inefficiency. These results imply that the impact of each type of subsidy on technical efficiency can be different and that the effect of the particular type of subsidy can vary between transient and persistent technical inefficiency.

This paper assesses the influence of heat and drought stress on the economic performance of the European dairy sector. Climatic data from the Gridded Agro-Meteorological data in Europe were combined with dairy enterprise data from the Farm Accountancy Data Network, resulting in a data set of 4412 farms in 22 European Union (EU) countries over the period 2007–2013. Since the performance of dairy farms is influenced by the context in which they operate, farms were grouped into areas representing similar climatic conditions through the use of a latent class analysis. Technical efficiency (TE) and economic downside risk were used as performance indicators against which the effect of climatic stress factors was evaluated. TE was estimated using a ‘true-fixed’ effect stochastic frontier model. Economic downside risk was based on gross margin deviations. Regression analysis suggests a significant negative effect of drought and heat stress on both TE and the downside gross margin difference in most climatic classes, with few exceptions. Results imply that both drought and heat stress-related issues need to be considered when designing adaptation strategies to address threats to the economic performance of the EU dairy sector.

We utilize a unique primary data set of farms in Russia and Kazakhstan to investigate the link between policy reforms and technical efficiency. These countries have heavily subsidized their domestic agricultural production over the last decade, with a total of around USD 76 billion USD and USD 11.5 billion USD in government funding directed towards the agricultural sectors in Russia and Kazakhstan, respectively. Results of a stochastic frontier analysis make evident that variable inputs, such as fertilizer, have a relatively large influence on wheat production compared to land. Nearly every fifth farm has a technical efficiency level lower than 60%, suggesting significant unrealized production potential. While our analysis shows a negative relation between subsidies and efficiency, other factors, such as farmer’s education, cooperative and agroholding membership, and participation in insurance programs, are positively related to farm efficiency. The results imply that the governments and policymakers could mobilize the unutilized wheat production potential by improving the farmer education system, fostering cooperation among farms, and developing functioning farm insurance schemes.

Reliance of modern economic activities on the use of energy, most of which still comes from non-renewable sources, provokes concerns regarding the most efficient utilization of energy inputs in production. While most theory expects directed technological change to be biased towards the non-renewable input, there is rare macro-level evidence that technological change is actually biased towards energy rather than other main inputs. To fill this gap, we apply stochastic frontier analysis to country data regarding output produced with capital, labor and energy, and estimate a set of indicators for technological change. Findings show that technological change is biased the most towards energy in general. In particular, although different groups of countries exhibit various patterns, there is strong evidence that technological change favors energy more than labor. This is in line with the theoretical expectation that technological change ought to be biased towards the non-renewable input rather than the renewable ones.

We estimate asymmetries in innovations to Solow residuals for 11 Organization for Economic Co-operation and Development (OECD) countries using stochastic frontier analysis. Likelihood ratio statistics and variance ratios imply that all countries with net energy imports have significant negative asymmetries, whereas other countries do not. We construct a simple theoretical model in which the measured Solow residual combines effects from technology, factor utilization, and the terms of trade. For oil importers, the model implies an asymmetric response of measured total factor productivity to oil price increases and decreases. When we condition Solow residuals separately on positive and negative oil price changes to allow asymmetric responses, evidence for remaining negative asymmetric innovations to the Solow residuals vanishes for all countries except Switzerland. Switzerland's relatively dominant financial sector suggests that their asymmetries could be due to a financial crisis, a hypothesis that we test and fail to reject.

This paper explores the role of managerial ability in determining efficiency in New York dairy farms. Using an unbalanced panel of farm data from 1993 through 2004, we estimate outputoriented technical efficiencies using stochastic distance frontier functions. We find that both lagged net farm income and farmers’ own estimates of the value of their labor and management as proxies for managerial ability impact measured efficiency. Efficiency increases with operator education, farm size, and extended participation in a farm management program, but decreases with operator age.

Pesticide applications are essential for peanut production to control insects, weeds, and other plant pathogens and for a profitable operation. We use a stochastic frontier analysis/primal system approach to test the hypothesis of the overuse of fungicides among peanut farmers. With nationally representative data available from the Agricultural and Resource Management Survey, we find evidence that U.S. peanut growers used excessive amounts of fungicides to prevent fungal infections. If those farmers adopt a new cultivar resistant to fungal pathogens, they could reduce the total cost of chemicals up to 36.2%. The reduction in fungicide use would have spillover environmental benefits.

The present study examines technical efficiency patterns in Ukraine's crop sector for 1991-1996. The economic and policy environment in Ukraine has changed since reform began in 1991. Many policy changes have exerted offsetting economic pressures on efficiency. Enterprise privatization and the liberalization of prices and trade put upward pressure on technical efficiency, whereas start-stop land privatization efforts, unpredictable government intervention, and slow developments in the credit and labor markets put downward pressure on efficiency. We found that technical efficiency appears to have improved slightly over the 1991-1996 period, suggesting that the positive forces had more impact.

In this study, the level of technical efficiency of 58 sheep farms rearing the Chios breed in Greece was measured through the application of the stochastic frontier analysis method. A Translog stochastic frontier production function was estimated using farm accounting data of Chios sheep farms and the impact of various socio-demographic and biophysical factors on the estimated efficiency of the farms was evaluated. The farms were classified into efficiency groups on the basis of the estimated level of efficiency and a technical and economic descriptive analysis was applied in order to illustrate an indicative picture of their structure and productivity. The results of the stochastic frontier model indicate that there are substantial production inefficiencies among the Chios sheep farms and that these farms could increase their production through the improvement of technical efficiency, whereas the results of the inefficiency effects model reveal that the farm-specific explanatory factors can partly explain the observed efficiency differentials. The measurement of technical inefficiency and the detection of its determinants can be used to form the basis of policy recommendations that could contribute to the development of the sector.