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Estimating fixed-effect panel stochastic frontier models by model transformation

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  • Wang, Hung-Jen
  • Ho, Chia-Wen

Abstract

Traditional panel stochastic frontier models do not distinguish between unobserved individual heterogeneity and inefficiency. They thus force all time-invariant individual heterogeneity into the estimated inefficiency. Greene (2005) proposes a true fixed-effect stochastic frontier model which, in theory, may be biased by the incidental parameters problem. The problem usually cannot be dealt with by model transformations owing to the nonlinearity of the stochastic frontier model. In this paper, we propose a class of panel stochastic frontier models which create an exception. We show that first-difference and within-transformation can be analytically performed on this model to remove the fixed individual effects, and thus the estimator is immune to the incidental parameters problem. Consistency of the estimator is obtained by either N-->[infinity] or T-->[infinity], which is an attractive property for empirical researchers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 157 (2010)
Issue (Month): 2 (August)
Pages: 286-296

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Handle: RePEc:eee:econom:v:157:y:2010:i:2:p:286-296

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Web page: http://www.elsevier.com/locate/jeconom

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Keywords: Stochastic frontier models Fixed effects Panel data;

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Citations

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Cited by:
  1. Thomas Triebs & Subal C. Kumbhakar, 2012. "Management Practice in Production," Ifo Working Paper Series Ifo Working Paper No. 129, Ifo Institute for Economic Research at the University of Munich.
  2. Hsu, Chih-Chiang & Lin, Chang-Ching & Yin, Shou-Yung, 2012. "Estimation of a panel stochastic frontier model with unobserved common shocks," MPRA Paper 37313, University Library of Munich, Germany.
  3. Alejandro Esteller-Moré, 2011. "Is the tax administration just a money machine? Empirical evidence on redistributive politics," Economics of Governance, Springer, vol. 12(3), pages 275-299, September.
  4. Fioramanti, Marco, 2011. "Knock-on effect of non-manufacturing regulation on manufacturing sectors efficiency and productivity," MPRA Paper 32237, University Library of Munich, Germany.

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