Abstract
This article formalises the idea of money-metric production frontiers, which we propose as a general framework for nonparametric evaluation of economic efficiency. This improves the flexibility and economic interpretation of our model.
The empirical part is the first attempt to test the existence of a size-efficiency relationship among small businesses in the United Kingdom. It is based on a unique panel both with respect to size — ranging from agriculture to services — and to the ten year time span.
We employ statistically robust methods to estimate and analyse sectoral efficiency. Our analysis yields three main insights: (1) Average sectors are expected to be two to four times less efficient than those on the efficient frontier.
Great dispersion of efficiency scores highlights the importance of dynamic out-of-equilibrium modelling. (2) There is no evidence of a general economy-wide size-efficiency relationship. (3) Economic efficiency remained constant over the past ten years.