An Analysis of Economic Efficiency Differences between Private and Public Food Processing Firms in Ethiopia: A Switching Regression Model

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Technical, allocative and economic efficiency measures are deri ved Jor a sample oj 73 Jood processing firms in Ethiopia. A switching regression model was used to examine potential selectivity bias for private and public owned firms. A three separated Stochastic Production Frontier (SPFs) and Cost Junctions corrected Jor selectivity bias were estimated for each group. The stochastic [rontier Cobb Douglas production and cost Junction model was used to measure the firm-level efficiency differential between private and public owned food processing firms alld to predict the firm level technical, economic and allocative efficiencies. The predicted technical efficiency and economic efficiency are the basis for estimating a/locative efficiency oJprivate and publiciirms under the study. The result olthe allalysis indicate that presence oj technical inefficiencv alld cost in ~/ficiellcy efFects in food processing .firms in general and in the 1)I{biic ./iJOd IJroeessillg finlls in particular, lvhich realized by the sigllifical1l estillJated gamllla cae{/Ieiellt.\' alld thl' generalized likelihood ratio tes/. The main results indicate that firms 'with private ownership show statistically higher average IE than those with public ownership. The estimated mean technical and economic efficiencies obtained f rom SPFs and cost Junction were higher for private food processing finns than their counterparts. Mareover the results indicate that mean technical efficiency levels affirms in the sector difFer profoundly .fiom the 56 percent 28 percent respectively for private and public firl1l s. This proves the fact that there is a wide 1'00111 for improvement. More precisely, on the average, output can be expallded by as much as 44 and 72 percent il appropriate measures are taken to illJProve the technical ~/Jiciency. The impact of privatization on TE was analyzed and found positive and have significallt eJfect 011 efficiency. Based on the resuits of the study, in order to promote eificient utilization of input resources, the government should speed up the privatization process and transfer the public firms in to private hands.



Economic Efficiency Differences, Food Processing Firms