Measuring trade openness and factor-specific production inefficiency with the stochastic frontier model.

Abstract

This thesis is composed of two chapters employing the same econometric technique: the stochastic frontier model. Chapter One offers a method of measuring trade openness at the country level, an issue which has long been important in the politics and economics of international trade. One existing method is first to predict each country's trade level in the absence of trade barriers using the Heckscher-Olin model, and then to attribute the departure of its actual trade from the model's prediction to its trade policy. One problem with this method is the difficulty of separating the degree of the departure due to trade barriers from the degree of departure due to other factors such as model mis-specification and measurement errors. As a result, the whole departure is taken as the impact of trade barriers. The major contribution of this essay is to introduce the stochastic frontier structure, a two-part composed error term with one non-positive and one two-sided term, into the trade model. This enables the first-order impact of trade barriers to be computed based on the one-sided term and therefore separated from other factors causing the departure. The rationale underlying this method is that trade barriers are the only factor having a first-order reducing effect on the net import. The proposed method gains significant support in various statistical tests. Measures of countries' trade barriers for each industry are also obtained. Chapter Two develops a more general form of the stochastic frontier production function model that allows for the measurement of inefficiency related to an individual factor. This model not only allows us to draw information from firms' input-output data regarding the efficiency of the firm as an economic unit, but also allows us to determine its efficiency in utilizing each type of input such as capital or labor. The model is applied to a sample of China's township, village and private (TVP) firms. The results indicate that these firms are relatively efficient in utilizing capital but inefficient in utilizing labor.