Estimation of a panel stochastic frontier model with unobserved common shocks

Chih-Chiang Hsu, Chang-Ching Lin and Shou-Yung Yin

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops panel stochastic frontier models with unobserved common correlated effects. The common correlated effects provide a way of modeling cross-sectional dependence and represent heterogeneous impacts on individuals resulting from unobserved common shocks. Traditional panel stochastic frontier models do not distinguish between common correlated effects and technical inefficiency. In this paper, we propose a modified maximum likelihood estimator (MLE) that does not require estimating unobserved common correlated effects. We show that the proposed method can control the common correlated effects and obtain consistent estimates of parameters and technical efficiency for the panel stochastic frontier model. Our Monte Carlo simulations show that the modified MLE has satisfactory finite sample properties under a significant degree of cross-sectional dependence for relatively small T. The proposed method is also illustrated in applications based on a cross country comparison of the efficiency of banking industries.

Keywords: fixed effects; common correlated effects; factor structure; cross-sectional dependence; stochastic frontier (search for similar items in EconPapers)
JEL-codes: C23 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-ecm, nep-eff and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/56333/8/MPRA_paper_56333.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/65051/15/MPRA_paper_65051.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:37313

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