Total Factor Productivity Decomposition and Unobserved Heterogeneity in Stochastic Frontier Models

This study examines in an empirical comparison how different econometric specifications of stochastic frontier models affect the decomposition of total factor productivity growth. We estimate nine stochastic frontier models, which have been widely used in empirical investigations of sources of productivity growth. Our results show that the relative contribution of components to total factor productivity growth is quite sensitive to the choice of econometric model, which points to the need to select the “right” model. We apply various statistical tests to narrow the range of applicable models and identify additional criteria upon which to base the choice of non-nested models.