Estimation of Efficiency with the Stochastic Frontier Cost Function and Heteroscedasticity: A Monte Carlo Study

Taeyoon Kim, B Brorsen and Philip L. Kenkel

No 6408, 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: The objective of this article is to address heteroscedasticity in the stochastic frontier cost function using aggregated data and verify it using a Monte Carlo study. We find that when the translog form of a stochastic frontier cost function with aggregated data is estimated, all explanatory variables can inversely affect the variation of error terms. Our Monte Carlo study shows that heteroscedasticity is only significant in the random effect and the unexplained error term not in the inefficiency error term. Also, it does not cause biases, which is quite opposite of previous research. These are because our model is approximately defined by first order Taylor series around zero inefficiency area. But, disregarding heteroscedasticity causes the average inefficiency to be overestimated when the variation of inefficiency term dominates the other error terms.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 16
Date: 2008
New Economics Papers: this item is included in nep-ecm, nep-eff and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea08:6408

DOI: 10.22004/ag.econ.6408

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