Measurement of efficiency started with Farrell (1957) who, following Debreu (1951) and Koopmas (1951), proposed a division of efficiency into two components: technical efficiency, which represents a firm’s ability to produce a maximum level of output from a given level of inputs, and allocative efficiency, which is the ability of a firm to use inputs in optimal proportions, given their respective prices and available technology. The combination of these two measures yields the level of economic efficiency. There are several approaches to analyse the determinants of technical efficiency from stochastic production frontier functions. One set of authors followed a two- step procedure in which the frontier production function.
