A Semiparametric Stochastic Frontier Model with Correlated Effects

Abstract

We consider a semiparametric panel stochastic frontier model where one-sided firm effects representing inefficiencies are correlated with the regressors. A form of the Chamberlain-Mundlak device is used to relate the logarithm of the effects to the regressors resulting in a lognormal distribution for the effects. The function describing the technology is modeled nonparametrically using penalized splines. Both Bayesian and non-Bayesian approaches to estimation are considered, with an emphasis on Bayesian estimation. A Monte Carlo experiment is used to investigate the consequences of ignoring correlation between the effects and the regressors, and choosing the wrong functional form for the technology.

Citation

Hajargasht, G. and Griffiths, W.E. (2019), "A Semiparametric Stochastic Frontier Model with Correlated Effects", Topics in Identification, Limited Dependent Variables, Partial Observability, Experimentation, and Flexible Modeling: Part B (Advances in Econometrics, Vol. 40B), Emerald Publishing Limited, Leeds, pp. 1-28. https://doi.org/10.1108/S0731-90532019000040B002