What Causes Cross-Industry Differences of Technical Efficiency?: An Empirical Investigation

Using micro-level panel data of about 35,000 firms from the German Cost Structure Census, we analyze the differences of technical efficiency across industries. Technical efficiency is estimated by firms' fixed effects. One striking result is that the distribution of technical efficiency across industries is positively skewed. This is because the efficiency distribution is truncated at the lower end due to the least efficient firms which exit the market. We investigate the causes of technical efficiency differences across industries. Our econometric analyses provide evidence that capital and human capital intensity, the degree of vertical specialization as well as new firm formation rate are important for explaining the average technical efficiency of an industry.