A new approach to estimating a profit frontier using the censored stochastic frontier model

Tai-Hsin Huang, Dien-Lin Chiang and Chung-I Lin

The North American Journal of Economics and Finance, 2017, vol. 39, issue C, 68-77

Abstract: The translog profit functional form is widely used to study technical efficiency for banks. Although this functional form is known as being flexible, it is not applicable to those banks incurring economic losses. The recently developed approach, i.e., the censored stochastic frontier model (CSFM), by Tsay et al. (2013) appears to be superior to existing approaches, since CSFM does not need to transform negative profit into positive profit before taking the natural logarithm. The transformation with respect to the profit variable tends to bias the parameter estimates of the profit frontier and the subsequent profit efficiency measure. We show that the parameter estimates of CSFM have the desirable statistical properties. Moreover, empirical results reveal that the mean profit efficiency of CSFM is more robust than those models using transformed profits across the sub-periods 1991–1998 and 1999–2009.

Keywords: Translog profit frontier; Censored stochastic frontier model; Profit efficiency (search for similar items in EconPapers)
JEL-codes: C24 G21 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940816301875
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:39:y:2017:i:c:p:68-77

DOI: 10.1016/j.najef.2016.12.001

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().