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Measuring Efficiency using a Stochastic Frontier Latent Class Model

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  • Orea, Luis
  • Kumbhakar, Subal

Abstract

Efficiency estimation in stochastic frontier models typically assumes that the underlying production technology is the same for all firms. There might, however, be unobserved differences in technologies and input/output qualities that can be inappropriately labeled as inefficiency if such differences are not taken into account. We address this issue by developing Stochastic Frontier Latent Class Model in a “panel data” framework. This model exploits the information contained in the data more efficiently compared to the traditional cluster analysis. An application of the proposed model is presented using Spanish banking data.

Suggested Citation

  • Orea, Luis & Kumbhakar, Subal, 2002. "Measuring Efficiency using a Stochastic Frontier Latent Class Model," Efficiency Series Papers 2002/11, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
  • Handle: RePEc:oeg:wpaper:2002/11
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    File URL: https://www.unioviedo.es/oeg/ESP/esp_2002_11.pdf
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    References listed on IDEAS

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    1. Beard, T. Randolph & Caudill, Steven B. & Gropper, Daniel M., 1997. "The diffusion of production processes in the U.S. banking industry: A finite mixture approach," Journal of Banking & Finance, Elsevier, vol. 21(5), pages 721-740, May.
    2. Mester, Loretta J., 1997. "Measuring efficiency at U.S. banks: Accounting for heterogeneity is important," European Journal of Operational Research, Elsevier, vol. 98(2), pages 230-242, April.
    3. Rogers, Kevin E., 1998. "Nontraditional activities and the efficiency of US commercial banks," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 467-482, May.
    4. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    5. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211.
    6. Lang, Gunter & Welzel, Peter, 1996. "Efficiency and technical progress in banking Empirical results for a panel of German cooperative banks," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1003-1023, July.
    7. Resti, Andrea, 1997. "Evaluating the cost-efficiency of the Italian Banking System: What can be learned from the joint application of parametric and non-parametric techniques," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 221-250, February.
    8. Mester, Loretta J., 1993. "Efficiency in the savings and loan industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 267-286, April.
    9. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-374, October.
    10. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April.
    11. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-1266, September.
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    Cited by:

    1. Fernandez-Blanco, Victor & Orea, Luis & Prieto-Rodriguez, Juan, 2009. "Analyzing consumers heterogeneity and self-reported tastes: An approach consistent with the consumer's decision making process," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 622-633, August.

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