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A Bayesian Approach To Imposing Curvature On Distance Functions

The estimated parameters of output distance functions frequently violate the monotonicity, quasiconvexity and convexity constraints implied by economic theory, leading to estimated elasticities and shadow prices that are incorrectly signed, and ultimately to perverse conclusions concerning the effects of input and output changes on productivity growth and relative efficiency levels. We show how a Bayesian approach can be used to impose these constraints on the parameters of a translog output distance function. Implementing the approach involves the use of a Gibbs sampler with data augmentation. A Metropolis-Hastings algorithm is also used within the Gibbs to simulate observations from truncated pdfs. Our methods are developed for the case where panel data is available and technical inefficiency effects are assumed to be time-invariant. Two models � a fixed effects model and a random effects model � are developed and applied to panel data on 17 European railways. We observe significant changes in estimated elasticities and shadow price ratios when regularity restrictions are imposed

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Paper provided by School of Economics, University of Queensland, Australia in its series CEPA Working Papers Series with number WP032003.

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Date of creation: Aug 2003
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Handle: RePEc:qld:uqcepa:03
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  10. Fare, Rolf, et al, 1993. "Derivation of Shadow Prices for Undesirable Outputs: A Distance Function Approach," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 374-80, May.
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  15. Griffiths, William E. & O'Donnell, Christopher J. & Cruz, Agustina Tan, 1999. "Imposing Regularity Conditions On A System Of Cost And Factor Share Equations," Working Papers 12925, University of New England, School of Economics.
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  20. John R. Swinton, 1998. "At What Cost do We Reduce Pollution? Shadow Prices of SO2 Emissions," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 63-83.
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  23. Terrell, Dek, 1996. "Incorporating Monotonicity and Concavity Conditions in Flexible Functional Forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 179-94, March-Apr.
  24. Christopher J. O'Donnell & C. Richard Shumway & V. Eldon Ball, 1999. "Input Demands and Inefficiency in U.S. Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 865-880.
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