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Welfare Consequences of Information Aggregation and Optimal Market Size

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Abstract

We consider mostly Bayesian estimation of stochastic frontier models where one-sided inefficiencies and/or the idiosyncratic error term are correlated with the regressors. We begin with a model where a Chamberlain-Mundlak device is used to relate a transformation of time-invariant effects to the regressors. This basic model is then extended in several directions: First an extra one-sided error term is added to allow for time-varying efficiencies. Next, a model with an equation for instrumental variables and a more general error covariance structure is introduced to accommodate correlations between both error terms and the regressors. Finally, we show how the analysis can be extended to a nonparametric technology using Bayesian penalised splines. An application of the first and second models to Philippines rice data is provided. A limited Monte Carlo experiment is used to investigate the consequences of ignoring correlation between the effects and the regressors, and choosing the wrong functional form for the technology.

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  • William E. Griffiths & Gholamreza Hajargasht, 2015. "Welfare Consequences of Information Aggregation and Optimal Market Size," Department of Economics - Working Papers Series 1190, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:1190
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    More about this item

    Keywords

    Technical Efficiency; Penalised Splines; Gibbs Sampling;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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