Estimation of Inefficiency using a Firm-specific Frontier Model

Arabinda Das

MPRA Paper from University Library of Munich, Germany

Abstract: It has been argued that the deterministic frontier approach in inefficiency measurement has a major limitation as inefficiency is mixed with measurement error (statistical noise) in this approach. The result is that inefficiency is contaminated with noise. Later stochastic frontier approach improves the situation with allowing a statistical noise in the model which captures all other factors other than inefficiency. The stochastic frontier model has been used for inefficiency analysis despite its complicated form and estimation procedure. This paper introduced an extra parameter which estimates the amount of proportion that an error component shares in the observational error. An EM estimation approach is used for estimation of the model and a test procedure is developed to test the significance of presence of the error component in the observational error.

Keywords: stochastic frontier model; skew-normal distribution; identification; EM algorithm; Monte Carlo simulation. (search for similar items in EconPapers)
JEL-codes: C15 C21 C51 (search for similar items in EconPapers)
Date: 2013-04-13
New Economics Papers: this item is included in nep-ecm and nep-eff
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