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Does Xistence of Inefficiency Matter to a Neoclassical Xorcist? Some Econometric Issues in Panel Stochastic Frontier Models

In: Advances in Efficiency and Productivity Analysis

Author

Listed:
  • Subal C. Kumbhakar

    (State University of New York at Binghamton
    Business School)

  • David H. Bernstein

    (University of Miami)

Abstract

Does the presence of inefficiency affect estimation of the production function? This paper shows that one cannot ignore inefficiency in estimating the production function simply because standard neoclassical production theory does not recognize its existence. Exclusion of inefficiency can cause inconsistency in the estimates of the technology parameters due to omitted variables which are determinants of inefficiency. We show how one can avoid this inconsistency in estimating the production technology irrespective of whether one is interested in estimating inefficiency or not. Our proposed estimation methods use two state-of-the-art stochastic frontier (SF) panel models. Since distributional assumptions are often a bone of contention even among the followers of the SF approach, we focus on estimation methods that do not rely on distributional assumptions for the inefficiency and noise components.

Suggested Citation

  • Subal C. Kumbhakar & David H. Bernstein, 2021. "Does Xistence of Inefficiency Matter to a Neoclassical Xorcist? Some Econometric Issues in Panel Stochastic Frontier Models," Springer Proceedings in Business and Economics, in: Christopher F. Parmeter & Robin C. Sickles (ed.), Advances in Efficiency and Productivity Analysis, pages 139-161, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-47106-4_7
    DOI: 10.1007/978-3-030-47106-4_7
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