Estimation of semi- and nonparametric stochastic frontier models with endogenous regressors

Artem Prokhorov, Kien Tran and Mike Tsionas

Empirical Economics, 2021, vol. 60, issue 6, No 15, 3043-3068

Abstract: Abstract This paper considers the problem of estimating a nonparametric stochastic frontier model with shape restrictions and when some or all regressors are endogenous. We discuss three estimation strategies based on constructing a likelihood with unknown components. One approach is a three-step constrained semiparametric limited information maximum likelihood, where the first two steps provide local polynomial estimators of the reduced form and frontier equation. This approach imposes the shape restrictions on the frontier equation explicitly. As an alternative, we consider a local limited information maximum likelihood, where we replace the constrained estimation from the first approach with a kernel-based method. This means the shape constraints are satisfied locally by construction. Finally, we consider a smooth-coefficient stochastic frontier model, for which we propose a two-step estimation procedure based on local GMM and MLE. Our Monte Carlo simulations demonstrate attractive finite sample properties of all the proposed estimators. An empirical application to the US banking sector illustrates empirical relevance of these methods.

Keywords: Constrained semiparametric limited information MLE; Efficiency; Endogeneity; Local limited information MLE; Smooth coefficient; Stochastic frontier (search for similar items in EconPapers)
JEL-codes: C13 C14 C36 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-020-01941-0

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