Technical efficiency of construction companies: A stochastic frontier model with dependent error

Roslah Arsad, Zaidi Isa, Ruzanna Ab Razak

Research output: Contribution to journalArticle

Abstract

There are several problems with using the Standard Stochastic Frontier (SF) model to produce a company’s technical efficiencies. One of the problem is the hypothesis of independence between the error components, known as, statistical noise and inefficiency term. Recent studies have used the SFA-copula model where the copula element captures the joint distribution of the two error components thus assuming that the errors are dependent. This research seeks to use the Cobb-Douglas Stochastic Frontier production model (standard model), SFA-copula models and DEA models (DEA-CCR and DEA-BCC) to compare the technical efficiencies of 12 publicly listed construction companies in Malaysia. The latter models are non-parametric frontier models which will be used as a base to determine the best SF model. The four copulas considered in this study are Clayton, Gumbel, A12 and Product copulas. The main findings of this study are the SFA-copula models showed consistency in terms efficiency scores and rankings of companies as compared to DEA models. The results further raise the question of the reliability of standard SF model especially when SFA-product copula was chosen as the best model for measuring efficiency performance. Therefore, it is obvious that it is not possible to ignore the reliance between the noise and inefficiency term.

Original languageEnglish
Pages (from-to)624-629
Number of pages6
JournalInternational Journal of Recent Technology and Engineering
Volume8
Issue number2 Special Issue 11
DOIs
Publication statusPublished - Sep 2019

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Stochastic models
Industry
Stochastic frontier model
Technical efficiency
Copula
Construction companies

Keywords

  • Company’s performance
  • Copula
  • Stochastic frontier
  • Technical efficiency

ASJC Scopus subject areas

  • Engineering(all)
  • Management of Technology and Innovation

Cite this

Technical efficiency of construction companies : A stochastic frontier model with dependent error. / Arsad, Roslah; Isa, Zaidi; Razak, Ruzanna Ab.

In: International Journal of Recent Technology and Engineering, Vol. 8, No. 2 Special Issue 11, 09.2019, p. 624-629.

Research output: Contribution to journalArticle

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