Some specification aspects for three-factor models of a company's production potential taking into account intellectual capital

As a contribution to further development of the stochastic frontier methodology the specification method for a 3-factor stochastic model of the production potential of a company is given. Along with labor input and physical capital input we consider intellectual capital as a basic production factor. For the description of a random variable that defines production efficiency the truncated at zero normal distribution is used. The presented formalized scheme that is based on hypothesis testing criteria and information about adequate efficiency factors allows one to choose a model reasonably. Practical approval of the given method is provided on the statistical data for the American companies operating in «Biotechnology and Drugs» sector and for the Russian companies operating in «Pharmaceutical production» and «Software development» areas. It is shown that unreasonable model specification may lead to significant distortions in the production efficiency estimates. For different estimations of intellectual capital hypothesis testing procedure regarding adequacy of the estimations is provided.