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Bounded rationality and thick frontiers in stochastic frontier analysis

Mike G. Tsionas

European Journal of Operational Research, 2020, vol. 284, issue 2, 762-768

Abstract: Recent research has proposed a statistical test based on the notion that agents have bounded rationality, if and only if more attractive states are chosen with larger probability. We propose and implement a statistical test for bounded rationality in the context of stochastic cost frontiers. Bounded rationality is related to probabilistically cost-efficient distributions. The test is based on comparing a discrete set of probabilities with the theoretical distribution under bounded rationality. Implementation is shown to be quite easy in a Bayesian framework using the Bayes factor for model comparison between estimated and theoretical probabilities. The bounded-rationality model introduces only an extra parameter in frontier models and, therefore, it is quite practical to use in applications as a general semi-parametric model for inefficiency.

Keywords: Decision support; Bounded rationality; Technical efficiency; Stochastic Frontier models; Bayesian analysis (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:284:y:2020:i:2:p:762-768

DOI: 10.1016/j.ejor.2019.12.010

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