Adjustment of Inputs and Measurement of Time-varying Technical Efficiency: A Dynamic Panel Data Analysis*

This paper provides estimation method to measure technical efficiency of production units and the speed of adjustment of output, both varying with time, from a dynamic stochastic production frontier that incorporates the sluggish adjustment of inputs. Using a panel dataset on private manufacturing establishments in Egypt, I find that the speed of adjustment of output is lower than unity in every period and slowly increases over time. When compared to the results from the static model, the dynamic model is found to produce higher estimates of technical efficiency on average, captures more variation in the time pattern of technical efficiency, and provides a different ranking of production units.