SFA was independently developed by Aigner et al. (1977), and Meeusen and van den Broeck
(1977). Based on this approach, the specification of the functional form of the frontier concerns the
introduction of an error term with two components; two-sided standard statistical noise component and
one sided, non-negative random variable representing inefficiencies. Specifically, the Battese and
Coelli (1995) model of a stochastic frontier function for panel data, which allows the estimation of
efficiency in a one-step pocedure, is employed as well as taking into account the environmental factors
during the estimation of efficiency. Using the model with environmental variables3 is much more
appropriate in the estimation of efficiencies in cross-country settings to avoid bias. The model
proposed by Battese and Coelli (1995) also eliminates some of the anomalies arised from the two-step
procedure4. The proposed stochastic frontier production model of the form is specified as follows: