Bayesian Estimation of Inefficiency Heterogeneity in Stochastic Frontier Models

Jorge Galan, Helena Veiga and Michael P. Wiper

No 2012/03, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

Abstract: Estimation of the one sided error component in stochastic frontier models may erroneously attribute firm characteristics to inefficiency if heterogeneity is unaccounted for. However, it is not clear in general in which component of the error distribution the covariates should be included. In the classical context, some studies include covariates in the scale parameter of the inefficiency with the property of preserving the shape of its distribution. We extend this idea to Bayesian inference for stochastic frontier models capturing both observed and unobserved heterogeneity under half normal, truncated and exponential distributed inefficiencies. We use the WinBugs package to implement our approach throughout. Our findings using two real data sets, illustrate the relevant effects on shrinking and separating individual posterior efficiencies when heterogeneity affects the scale of the inefficiency. We also see that the inclusion of unobserved heterogeneity is still relevant when no observable covariates are available or they are found to be technology related.

Keywords: Stochastic Frontier Models; Heterogeneity; Bayesian Inference (search for similar items in EconPapers)
JEL-codes: C11 C23 C51 D24 (search for similar items in EconPapers)
Pages: 27
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Bayesian estimation of inefficiency heterogeneity in stochastic frontier models (2014)
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