Using stochastic frontier analysis to measure the satisfactory efficiency of countries

Abstract

Happiness is a macro-economic standard and a micro-economic measure to reveal an individual's true well-being, which has gained considerable attention from both academics and policymakers. The research adopts the concept of happiness relating to the appraisal of life satisfaction or quality of life, which is measured over a period. The determinants of life satisfaction are searched at both individual-level and country-level, which present a wide spectrum of both socio-economic status and personal traits. The study utilizes data from the World Value Survey (WVS), from which 31 variables are selected to employ in the model. The paper applies Stochastic Frontier Analysis (SFA) to quantify the abstract concept of satisfaction and measure how efficiently countries translate their resource endowments into satisfaction. This model helps to recognize random noises from inefficiency. The results show that absolute economic value does not need to increase efficiency when converting inputs into well-being, but relative financial satisfaction is the main factor driving satisfactory efficiency. In line with previous studies, the quality of social fabric, such as freedom and trust, supports the conversion of other inputs into happiness. The findings also find new determinants of age and location (rural and urban areas), which also influence conversion efficiency.