Technical Inefficiency and Public Capital in U.S. States: A Stochastic Frontier Approach

This paper estimates a translog stochastic frontier production function in the analysis of all 48 contiguous U.S. states in the period 1970–1983, to attempt to measure and explain changes in technical efficiency. The model allows technical inefficiency to vary over time, and inefficiency effects to be a function of a set of explanatory variables in which the level and composition of public capital plays an important role. Results indicate that U.S. state inefficiency levels are significantly and positively correlated with the ratio of public capital to private capital. The proportion of public capital devoted to highways is negatively correlated with technical inefficiency, suggesting that not only the level but also the composition of public capital influences state efficiency.