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Estimation of Inefficiency using a Firm-specific Frontier Model

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  • Das, Arabinda

Abstract

It has been argued that the deterministic frontier approach in inefficiency measurement has a major limitation as inefficiency is mixed with measurement error (statistical noise) in this approach. The result is that inefficiency is contaminated with noise. Later stochastic frontier approach improves the situation with allowing a statistical noise in the model which captures all other factors other than inefficiency. The stochastic frontier model has been used for inefficiency analysis despite its complicated form and estimation procedure. This paper introduced an extra parameter which estimates the amount of proportion that an error component shares in the observational error. An EM estimation approach is used for estimation of the model and a test procedure is developed to test the significance of presence of the error component in the observational error.

Suggested Citation

  • Das, Arabinda, 2013. "Estimation of Inefficiency using a Firm-specific Frontier Model," MPRA Paper 46168, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:46168
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    References listed on IDEAS

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    More about this item

    Keywords

    stochastic frontier model; skew-normal distribution; identification; EM algorithm; Monte Carlo simulation.;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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