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Is the choice of (t−T) in Battese and Coelli (1992) type stochastic frontier models innocuous? Observations and generalisations

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  • Wheat, Phill
  • Smith, Andrew

Abstract

In this paper we consider the sensitivity of functional form in the popular panel data stochastic frontier model proposed by Battese and Battese and Coelli (BC, 1992). We demonstrate that adopting the (t−T) efficiency functional form used by BC can, in a model which allows for firm specific patterns of temporal inefficiency variation (as developed by Cuesta, 2000), results in counter intuitive ‘falling-off’ of efficient firms in the final sample year. This motivates us to look at a more general parameterisation. First we show that the choice of a function within the first order exponential class is only an issue for the Cuesta model; in the BC model, parameter estimates and inefficiency estimates are invariant to the form. Second we apply the more general model to a railways dataset and find that this model does not seem to suffer from the most efficient firms falling off the frontier. We discuss how to test restrictions in order to make the model more parsimonious, thus preserving the attractive property of the Cuesta model, namely the ability to test for firm specific patterns of inefficiency variation.

Suggested Citation

  • Wheat, Phill & Smith, Andrew, 2012. "Is the choice of (t−T) in Battese and Coelli (1992) type stochastic frontier models innocuous? Observations and generalisations," Economics Letters, Elsevier, vol. 116(3), pages 291-294.
    • Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:291-294
    DOI: 10.1016/j.econlet.2012.03.013
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    References listed on IDEAS

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    1. Lee, Young Hoon, 2010. "Group-specific stochastic production frontier models with parametric specifications," European Journal of Operational Research, Elsevier, vol. 200(2), pages 508-517, January.
    2. Rafael Cuesta, 2000. "A Production Model With Firm-Specific Temporal Variation in Technical Inefficiency: With Application to Spanish Dairy Farms," Journal of Productivity Analysis, Springer, vol. 13(2), pages 139-158, March.
    3. Andrew S. J. Smith & Phil Wheat, 2012. "Evaluating Alternative Policy Responses to Franchise Failure: Evidence from the Passenger Rail Sector in Britain," Journal of Transport Economics and Policy, University of Bath, vol. 46(1), pages 25-49, January.
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    More about this item

    Keywords

    Stochastic frontier; Efficiency; Functional form;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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