A new stochastic frontier model with cross-sectional effects in both noise and inefficiency terms

Luis Orea and Inmaculada Álvarez

Journal of Econometrics, 2019, vol. 213, issue 2, 556-577

Abstract: This paper develops a new stochastic frontier model that allows for cross-sectional (spatial) correlation in both the noise and inefficiency terms, which are likely to be of a different nature. The main econometric novelty of the proposed model is that it can be estimated in a straightforward manner by maximum likelihood and non-linear least squares. The proposed model is useful when there are omitted but spatially correlated variables, the firms benefit from best practices implemented by other firms, or common factors prevent the firms to improve their performance. An application to the Norwegian electricity distribution sector is also provided.

Keywords: Stochastic frontier models; Spatial econometrics; Electricity distribution (search for similar items in EconPapers)
JEL-codes: C21 C51 L25 L51 L94 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Working Paper: A new stochastic frontier model with cross-sectional effects in both noise and inefficiency terms (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:213:y:2019:i:2:p:556-577

DOI: 10.1016/j.jeconom.2019.07.004

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