A new stochastic frontier model with cross-sectional effects in both noise and inefficiency terms
Luis Orea () and
Inmaculada Álvarez ()
No 2017/04, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)
This paper develops a new stochastic frontier model that allows for cross-sectional (spatial) correlation in both the noise and inefficiency terms. The model proposed is useful in efficiency analyses when there are omitted but spatially-correlated variables and firms benefit from best practices implemented by other (adjacent) firms. Unlike the previous literature, our model can be estimated by maximum likelihood using standard software. The model is illustrated with an application to the Norwegian electricity distribution sector.
New Economics Papers: this item is included in nep-ecm, nep-eff and nep-ene
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