Economic theory and econometric practice: parametric efficiency analysis

Parametric efficiency analysis is one of the most investigated areas in applied pro-duction economics. Nevertheless, the vast majority of empirical studies are not ac-companied by a thorough theoretical interpretation of the underlying functional form and the obtained estimates. The robustness of policy suggestions based on inferences from efficiency measures nevertheless crucially depends on theoretically well-founded estimates. This research contribution addresses parametric efficiency measurement by critically reviewing the theoretical consistency of recently published technical effi-ciency estimates. The theoretical concerns are verified by empirical applications con-firming the need for a posteriori checking the regularity of the estimated frontier by the researcher and, if necessary, the a priori imposition of the theoretical require-ments. Bootstrapping based stochastic simulations of a simple parametric efficiency model by using different flexible functional forms confirmed the severeness of the theoretical concerns especially with respect to the merely locally restrictable translog specification.