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A zero inefficiency stochastic frontier model

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  • Kumbhakar, Subal C.
  • Parmeter, Christopher F.
  • Tsionas, Efthymios G.

Abstract

Traditional stochastic frontier models impose inefficient behavior on all firms in the sample of interest. If the data under investigation represent a mixture of both fully efficient and inefficient firms then off-the-shelf frontier models are statistically inadequate. We introduce the zero inefficiency stochastic frontier model which can accommodate the presence of both efficient and inefficient firms in the sample. We derive the corresponding log-likelihood function, conditional mean of inefficiency, to estimate observation-specific inefficiency and discuss testing for the presence of fully efficient firms. We provide both simulated evidence as well as an empirical example which demonstrates the applicability of the proposed method.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 172 (2013)
Issue (Month): 1 ()
Pages: 66-76

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Handle: RePEc:eee:econom:v:172:y:2013:i:1:p:66-76

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

Related research

Keywords: Full efficiency; Zero-inefficiency; Mixture; Banking;

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Cited by:
  1. William C. Horrace & Christopher F. Parmeter, 2014. "A Laplace Stochastic Frontier Model," Center for Policy Research Working Papers 166, Center for Policy Research, Maxwell School, Syracuse University.

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