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Stochastic Frontiers and Asymmetric Information Models

Philippe Gagnepain () and Marc Ivaldi ()

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Abstract: This article is an attempt to shed light on the specification and identification of inefficiency in stochastic frontiers. We consider the case of a regulated firm or industry. Applying a simple principal-agent framework that accounts for informational asymmetries to this context, we derive the associated production and cost frontiers. Noticeably this approach yields a decomposition of inefficiency into two components: The first component is a pure random term while the second component depends on the unobservable actions taken by the agent (the firm). This result provides a theoretical foundation to the usual specification applied in the literature on stochastic frontiers. An application to a panel data set of French urban transport networks serves as an illustration.

Date: 2002
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Published in Journal of Productivity Analysis, Springer Verlag, 2002, 18, pp.145-159

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Journal Article: Stochastic Frontiers and Asymmetric Information Models (2002) Downloads
Working Paper: Stochastic Frontiers and Asymmetric Information Models (1998)
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