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Estimating a mixture of stochastic frontier regression models via the em algorithm: A multiproduct cost function application

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  • Steven B. Caudill

Abstract

Researchers have become increasingly interested in estimating mixtures of stochastic frontiers. Mester (1993), Caudill (1993), and Polachek and Yoon (1987), for example, estimate stochastic frontier models for different regimes, assuming sample separation information is given. Building on earlier work by Lee and Porter (1984), Douglas, Conway, and Ferrier (1995) estimate a stochastic frontier switching regression model in the presence of noisy sample separation information. The purpose of this paper is to extend earlier work by estimating a mixture of stochastic frontiers assuming no sample separation information. This case is more likely to occur in practice than even noisy sample separation information. In order to estimate a mixture of stochastic frontiers with no sample separation information, an EM algorithm to obtain maximum likelihood estimates is developed. The algorithm is used to estimate a mixture of stochastic (cost) frontiers using data on U.S. savings and loans for the years 1986, 1987, and 1988. Statistical evidence is found supporting the existence of a mixture of stochastic frontiers. Copyright Springer-Verlag Berlin Heidelberg 2003

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File URL: http://hdl.handle.net/10.1007/s001810200147
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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 28 (2003)
Issue (Month): 3 (July)
Pages: 581-598

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Handle: RePEc:spr:empeco:v:28:y:2003:i:3:p:581-598

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Related research

Keywords: Key words: Mixture model; Stochastic frontier; efficiency; JEL: C24; C81; D24;

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Cited by:
  1. G Johnes & J Johnes, 2005. "Higher education institutions' costs and efficiency: taking the decomposition a further step," Working Papers 574007, Lancaster University Management School, Economics Department.

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