One-step and two-step estimation of the effects of exogenous variables on technical efficiency levels
Consider a stochastic frontier model with one-sided inefficiency u, and suppose that the scale of u depends on some variables (firm characteristics) z. A one-step model specifies both the stochastic frontier and the way in which u depends on z, and can be estimated in a single step, for example by maximum likelihood. This is in contrast to a two-step procedure, where the first step is to estimate a standard stochastic frontier model, and the second step is to estimate the relationship between (estimated) u and z. In this paper we propose a class of one-step models based on the scaling property that u equals a function of z times a one-sided error u * whose distribution does not depend on z. We explain theoretically why two-step procedures are biased, and we present Monte Carlo evidence showing that the bias can be very severe. This evidence argues strongly for one-step models whenever one is interested in the effects of firm characteristics on efficiency levels.
|Date of creation:||Oct 2001|
|Date of revision:||Mar 2002|
|Publication status:||Published in Journal of Productivity Analysis 18.2(2002): pp. 129-144|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- RITTER, Christian & SIMAR, Leopold, 1994.
"Pitfalls of Normal-Gamma Stochastic Frontier Models,"
CORE Discussion Papers
1994041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Christian Ritter & Léopold Simar, 1997. "Pitfalls of Normal-Gamma Stochastic Frontier Models," Journal of Productivity Analysis, Springer, vol. 8(2), pages 167-182, May.
- Ritter, C. & Simar, L., . "Pitfalls of normal-gamma stochastic frontier models," CORE Discussion Papers RP 1272, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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, vol. 20(2), pages 325-32.
- Kumbhakar, Subal C & Ghosh, Soumendra & McGuckin, J Thomas, 1991. "A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 279-86, July.
- Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
- Caudill, Steven B. & Ford, Jon M., 1993. "Biases in frontier estimation due to heteroscedasticity," Economics Letters, Elsevier, vol. 41(1), pages 17-20.
- Caudill, Steven B & Ford, Jon M & Gropper, Daniel M, 1995. "Frontier Estimation and Firm-Specific Inefficiency Measures in the Presence of Heteroscedasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 105-11, January.
- Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-23, August.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:31075. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.