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Evaluating the CDF of the distribution of the stochastic frontier composed error

Christine Amsler, Peter Schmidt () and Wen-Jen Tsay ()
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Christine Amsler: Michigan State University
Peter Schmidt: Michigan State University

Journal of Productivity Analysis, 2019, vol. 52, issue 1, No 2, 29-35

Abstract: Abstract In the stochastic frontier model, the composed error is the sum (or difference) of a normal and a half normal random variable. Often the composed error is linked to other errors using a copula, and evaluation of the copula requires evaluation of the cdf of the composed error. There is no analytical expression for this cdf, though there are several approximations. We propose a computationally efficient simulation based method of evaluation and use it to evaluate the accuracy of these approximations. We also derive the exact cdf of the composed error for the special case that the stochastic frontier relative variance parameter λ equals one, and we use this expression to investigate the accuracy of our evaluations and the existing approximations.

Keywords: Stochastic frontier; Composed error; Skew normal distribution (search for similar items in EconPapers)
JEL-codes: C13 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s11123-019-00554-9

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