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Persistent and Transient Productive Inefficiency: A Maximum Simulated Likelihood Approach

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Abstract

The productive efficiency of a firm can be seen as composed of two parts, one persistent and one transient. The received empirical literature on the measurement of productive efficiency has paid relatively little attention to the difference between these two components. Ahn, Good and Sickles (2000) suggested some approaches that pointed in this direction. The possibility was also raised in Greene (2004), who expressed some pessimism over the possibility of distinguishing the two empirically. Recently, Colombi (2010) and Kumbhakar and Tsionas (2012), in a milestone extension of the stochastic frontier methodology have proposed a tractable model based on panel data the promises to provide separate estimates of the two components of efficiency. The approach developed in the original presentation proved very cumbersome actually to implement in practice. Colombi (2010) notes that FIML estimation of the model is ‘complex and time consuming.’ In the sequence of papers, Colombi (2010), Colombi et al. (2011, 2014), Kumbhakar, Lien and Hardaker (2012) and Kumbhakar and Tsionas (2012) have suggested other strategies, including a four step least squares method. The main point of this paper is that full maximum likelihood estimation of the model is neither complex nor time consuming. The extreme complexity of the log likelihood noted in Colombi (2010), Colombi et al. (2011, 2014) is reduced by using simulation and exploiting the Butler and Moffitt (1982) formulation. In this paper, we develop a practical full information maximum simulated likelihood estimator for the model. The approach is very effective and strikingly simple to apply, and uses all of the sample distributional information to obtain the estimates. We also implement the panel data counterpart of the JLMS (1982) estimator for technical or cost inefficiency. The technique is applied in a study of the cost efficiency of Swiss railways.

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  • Massimo Filippini & William Greene, 2014. "Persistent and Transient Productive Inefficiency: A Maximum Simulated Likelihood Approach," CER-ETH Economics working paper series 14/197, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:14-197
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    1. Roberto Colombi & Subal Kumbhakar & Gianmaria Martini & Giorgio Vittadini, 2014. "Closed-skew normality in stochastic frontiers with individual effects and long/short-run efficiency," Journal of Productivity Analysis, Springer, vol. 42(2), pages 123-136, October.
    2. Roberto Colombi & Gianmaria Martini & Giorgio Vittadini, 2011. "A Stochastic Frontier Model with short-run and long-run inefficiency random effects," Working Papers 1101, Department of Management, Information and Production Engineering, University of Bergamo.
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    4. Mehdi Farsi & Massimo Filippini & William Greene, 2005. "Efficiency Measurement in Network Industries: Application to the Swiss Railway Companies," Journal of Regulatory Economics, Springer, vol. 28(1), pages 69-90, July.
    5. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017, October.
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    7. 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.
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    More about this item

    Keywords

    productive efficiency; stochastic frontier analysis; panel data; transient and persistent efficiency.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D2 - Microeconomics - - Production and Organizations
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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