An evaluation of economic efficiency of finnish regions by DEA and Tobit models

Abstract

Private sector economic efficiency of 83 Finnish regions (labour market areas) in 1988-1999 is investigated by a two stage procedure. In the first stage non-parametric Data Envelopment Analysis (DEA) is used for calculating a best practise production frontier and relative efficiency scores for the regions. Outputs are regional value added and personal direct real income from employment. Inputs of the study include capital stock, employment by education level, years of schooling and volume of local public sector activity. In the second stage, regional differences in efficiency are studied by explaining inefficiency scores (1-efficiency scores) by econometric Tobit models. Here the independent variables include factors which were not explicitly included in the DEA-models such as size (population), location (economic distance) and production structure of regions.