Constraints in models of production and cost via slack-based measures

Caroline Khan () and Mike Tsionas
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Caroline Khan: King Abdulaziz University

Empirical Economics, 2021, vol. 61, issue 6, No 13, 3347-3374

Abstract: Abstract In this paper, we propose the use of stochastic frontier models to impose theoretical regularity constraints (like monotonicity and concavity) on flexible functional forms. These constraints take the form of inequalities involving the data and the parameters of the model. We address a major concern when statistically endogenous variables are present in these inequalities. We present results with and without endogeneity in the inequality constraints. In the system case (e.g., cost-share equations) or more generally, in production function-first-order conditions case, we detect an econometric problem which we solve successfully. We provide an empirical application to US electric power generation plants during 1986–1997, previously used by several authors.

Keywords: Stochastic frontier models; Regularity constraints; Endogeneity problem; Bayesian analysis; Markov Chain Monte Carlo (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00181-020-02013-z

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