Maximum likelihood estimation of stochastic frontier models by the Fourier transform

Mike Tsionas

Journal of Econometrics, 2012, vol. 170, issue 1, 234-248

Abstract: The paper is concerned with several kinds of stochastic frontier models whose likelihood function is not available in closed form. First, with output-oriented stochastic frontier models whose one-sided errors have a distribution other than the standard ones (exponential or half-normal). The gamma and beta distributions are leading examples. Second, with input-oriented stochastic frontier models which are common in theoretical discussions but not in econometric applications. Third, with two-tiered stochastic frontier models when the one-sided error components follow gamma distributions. Fourth, with latent class models with gamma distributed one-sided error terms. Fifth, with models whose two-sided error component is distributed as stable Paretian and the one-sided error is gamma. The principal aim is to propose approximations to the density of the composed error based on the inversion of the characteristic function (which turns out to be manageable) using the Fourier transform. Procedures that are based on the asymptotic normal form of the log-likelihood function and have arbitrary degrees of asymptotic efficiency are also proposed, implemented and evaluated in connection with output-oriented stochastic frontiers. The new methods are illustrated using data for US commercial banks, electric utilities, and a sample from the National Youth Longitudinal Survey.

Keywords: Stochastic frontiers; Moment generating function; Characteristic function; Fast Fourier transform; Maximum likelihood; Generalized method of moments (search for similar items in EconPapers)
JEL-codes: C13 C16 C46 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:170:y:2012:i:1:p:234-248

DOI: 10.1016/j.jeconom.2012.04.001

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