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sftfe: A Stata command for fixed-effects stochastic frontier models estimation

Federico Belotti () and Giuseppe Ilardi

Italian Stata Users' Group Meetings 2014 from Stata Users Group

Abstract: The classical stochastic frontier panel-data models provide no mechanism to disentangle individual time-invariant unobserved heterogeneity from inefficiency. Greene (2005a,b) proposed the so-called true fixed-effects specification that distinguishes these two latent components and allows for time-varying inefficiency. However, because of the incidental parameters problem, the maximum likelihood estimator proposed by Greene leads to biased variance estimates in short panels. sftfe allows the estimation of this model via three alternative estimators (Belotti and Ilardi 2012; Chen et al. 2014), which by relying on data transformation, achieve consistency for n ! 1 with fixed T. Of special note is that sftfe allows the underlying mean and variance of the inefficiency to be expressed as functions of exogenous covariates. Furthermore, the new command allows the estimation of a "true" fixed-effects model in which the inefficiency is assumed to follow a first-order autoregressive process. These features can be considered relevant from the methodological point of view because both model parameters and inefficiency estimates may be adversely affected when inefficiency heterogeneity, heteroskedasticity, and serial correlation are neglected. They are also important empirically because they allow for testing specific hypotheses of interest and policy implications and avoid biased two-step procedures.

Date: 2014-11-13
New Economics Papers: this item is included in nep-eff
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