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Maximum likelihood estimation of a stochastic frontier model with residual covariance

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  • Simwaka, Kisu

Abstract

In theoretical literature on productivity, the disturbance terms of the stochastic frontier model are assumed to be independent random variables. In this paper, we consider a stochastic production frontier model with residuals that are both spatially and time-wise correlated. We introduce generalizations of the Maximum Likelihood Estimation procedure suggested in Cliff and Ord (1973) and Kapoor (2003). We assume the usual error component specification, but allow for possible correlation between individual specific errors components. The model combines specifications usually considered in the spatial literature with those in the error components literature. Our specifications are such that the model’s disturbances are potentially spatially correlated due to geographical or economic activity. For instance, for agricultural farmers, spatial correlations can represent productivity shock spillovers, based on geographical proximity and weather. These spillovers effect estimation of efficiency.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39726.

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Date of creation: 27 Jun 2012
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Handle: RePEc:pra:mprapa:39726

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Keywords: spatial stochastic production frontier models; correlated errors;

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  1. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, Springer, vol. 20(2), pages 325-32.
  2. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1989. "Production Frontiers With Cross-Sectinal And Time-Series Variation In Efficiency Levels," Working Papers, C.V. Starr Center for Applied Economics, New York University 89-18, C.V. Starr Center for Applied Economics, New York University.
  3. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, Elsevier, vol. 46(1-2), pages 201-211.
  4. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 2(4), pages 367-74, October.
  5. Pitt, Mark M. & Lee, Lung-Fei, 1981. "The measurement and sources of technical inefficiency in the Indonesian weaving industry," Journal of Development Economics, Elsevier, Elsevier, vol. 9(1), pages 43-64, August.
  6. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, Elsevier, vol. 6(1), pages 21-37, July.
  7. Kelejian, Harry H & Prucha, Ingmar R, 1999. "A Generalized Moments Estimator for the Autoregressive Parameter in a Spatial Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 509-33, May.
  8. Kelejian, Harry H & Prucha, Ingmar R, 1998. "A Generalized Spatial Two-Stage Least Squares Procedure for Estimating a Spatial Autoregressive Model with Autoregressive Disturbances," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 17(1), pages 99-121, July.
  9. Kelejian, Harry H. & Prucha, Ingmar R., 2007. "HAC estimation in a spatial framework," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 131-154, September.
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