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LASSO for Stochastic Frontier Models with Many Efficient Firms

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Abstract

We apply the adaptive LASSO (Zou, 2006) to select a set of maximally efficient firms in the panel fixed-effect stochastic frontier model. The adaptively weighted L1 penalty with sign restrictions for firm-level inefficiencies allows simultaneous estimation of the maximal efficiency and firm-level inefficiency parameters, which results in a faster rate of convergence of the corresponding estimators than the least-squares dummy variable approach. We show that the estimator possesses the oracle property and selection consistency still holds with our proposed tuning parameter selection criterion. We also propose an efficient optimization algorithm based on coordinate descent. We apply the method to estimate a group of efficient police officers who are best at detecting contraband in motor vehicle stops (i.e., search efficiency) in Syracuse, NY.

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  • William C. Horrace & Hyunseok Jung & Yoonseok Lee, 2022. "LASSO for Stochastic Frontier Models with Many Efficient Firms," Center for Policy Research Working Papers 248, Center for Policy Research, Maxwell School, Syracuse University.
    • Handle: RePEc:max:cprwps:248
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    File URL: https://surface.syr.edu/cpr/416/
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    Cited by:

    1. William C. Horrace & Hyunseok Jung & Yi Yang, 2023. "The conditional mode in parametric frontier models," Journal of Productivity Analysis, Springer, vol. 60(3), pages 333-343, December.

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    Keywords

    Panel Data; Fixed-Effect Stochastic Frontier Model; Adaptive LASSO; L1 Regularization; Sign Restriction; Zero Inefficiency;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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