Addressing Spatial Heterogeneity in Regional Technical Efficiency

A new production-frontier specification is proposed when dealing with decision-making units whose efficiencies are correlated with the performances of the neighbors (spatial dependence), providing a bias reduction with respect to standard data envelopment analysis (DEA) methods. For the constructed European Union (EU) regional production frontiers over the period 2000-2014, the estimated SDEA scores show a transformation over time from a uni-modal distribution to a bimodal distribution do not detected by the DEA frontiers, providing new insights on the causes of the observed polarization of the European distribution of output per worker and per capita income.