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Spatial stochastic frontier model with stochastic weighting matrix

Author

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  • Ming-Yu Deng

    (Anhui University of Finance & Economics, School of Statistics and Applied Mathematics)

  • Levent Kutlu

    (University of Texas Rio Grande Valley, Department of Economics)

Abstract

This paper develops a spatial autoregressive stochastic frontier model that allows the spatial weighting matrix to be stochastic. This approach captures spatial heterogeneity in the interactions among production units and quantifies random spatial dependencies arising from this variability. The model parameters are estimated using a simulated maximum likelihood approach. We propose a method to simulate spillover-corrected direct, indirect, and total efficiency estimates. Additionally, we conduct Monte Carlo simulations to evaluate the finite-sample performance of the proposed model. Finally, an empirical application to the efficiency of Spanish dairy farms is presented to demonstrate the practical implementation of our methodology.

Suggested Citation

  • Ming-Yu Deng & Levent Kutlu, 2025. "Spatial stochastic frontier model with stochastic weighting matrix," Empirical Economics, Springer, vol. 69(5), pages 2783-2815, November.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:5:d:10.1007_s00181-025-02815-z
    DOI: 10.1007/s00181-025-02815-z
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    Keywords

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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