Econometric efficiency analysis: A policy-oriented review

The econometric approach to the construction of production, cost and other frontiers, and the measurement of efficiency relative to these frontiers, historically has had a strong policy orientation. This distinguishes the approach from the mathematical programming approach, which has had a managerial decision-making orientation geared to solving allocation problems within the public or private organization. In this paper I review the development of the econometric approach to efficiency analysis. I then discuss a small number of empirical studies chosen to illustrate the application of the econometric approach to a collection of public policy issues for which the notion of efficiency measurement is of prime importance. Examples are drawn from the areas of (1) agricultural productivity, (2) labor market efficiency and equity, (3) the measurement of the standard of living, (4) the establishment of quality of service standards, and (5) the valuation of environmental disamenities.