Neoclassical versus Frontier Production Models? Testing for the Skewness of Regression Residuals

The empirical literature on production and cost functions is divided into two strands. The neoclassical approach concentrates on model parameters, while the frontier approach decomposes the disturbance term to a symmetric noise term and a positively skewed inefficiency term. We propose a theoretical justification for the skewness of the inefficiency term, arguing that this skewness is the key testable hypothesis of the frontier approach. We propose to test the regression residuals for skewness in order to distinguish the two competing approaches. Our test builds directly upon the asymmetry of regression residuals and does not require any prior distributional assumptions.