Stochastic Frontier Models with Threshold Efficiency

Young Hoon Lee and Sungwon Lee ()
Additional contact information
Sungwon Lee: Korea Development Institute

No 1205, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: This paper proposes a tail-truncated stochastic frontier model that allows for the truncation of technical efficiency from below. The truncation bound implies the inefficiency threshold for survival and also can be used as a measure of market competition. Specifically, this paper assumes a uniform distribution of technical inefficiency and derives the likelihood function. Even though this distributional assumption imposes a strong restriction that technical inefficiency has a uniform probability density over [0,], where is the threshold parameter, this model has two advantages: (i) the reduction of the number of parameters from the more complicated tail-truncated models allows better performance in numerical optimization; and (ii) the threshold parameter itself represents a degree of competition because the variance of technical inefficiency is dependent solely on the parameter. The Monte Carlo simulation results support the argument that this model approximates the distribution of inefficiency precisely.

Keywords: Stochastic frontier; technical efficiency; threshold inefficiency; uniform distribution; productivity distribution (search for similar items in EconPapers)
JEL-codes: C13 C21 D24 L25 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://tinyurl.com/ym925cql First version, 2012 (application/pdf)

Related works:
Journal Article: Stochastic frontier models with threshold efficiency (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:1205

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