Penalized sieve estimation of zero‐inefficiency stochastic frontiers

Jun Cai, William Horrace and Christopher F. Parmeter

Journal of Applied Econometrics, 2024, vol. 39, issue 1, 41-65

Abstract: Stochastic frontier models for cross‐sectional data typically assume that the one‐sided distribution of firm‐level inefficiency is continuous. However, it may be reasonable to hypothesize that inefficiency is continuous except for a discrete mass at zero capturing fully efficient firms (zero‐inefficiency). We propose a sieve‐type density estimator for such a mixture distribution in a nonparametric stochastic frontier setting under a unimodality‐at‐zero assumption. Consistency, rates of convergence and asymptotic normality of the estimators are established, as well as a test of the zero‐inefficiency hypothesis. Simulations and two applications are provided to demonstrate the practicality of the method.

Date: 2024
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