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A zero inefficiency stochastic frontier model

Author

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  • Kumbhakar, Subal C.
  • Parmeter, Christopher F.
  • Tsionas, Efthymios G.
Abstract
Traditional stochastic frontier models impose inefficient behavior on all firms in the sample of interest. If the data under investigation represent a mixture of both fully efficient and inefficient firms then off-the-shelf frontier models are statistically inadequate. We introduce the zero inefficiency stochastic frontier model which can accommodate the presence of both efficient and inefficient firms in the sample. We derive the corresponding log-likelihood function, conditional mean of inefficiency, to estimate observation-specific inefficiency and discuss testing for the presence of fully efficient firms. We provide both simulated evidence as well as an empirical example which demonstrates the applicability of the proposed method.

Suggested Citation

  • Kumbhakar, Subal C. & Parmeter, Christopher F. & Tsionas, Efthymios G., 2013. "A zero inefficiency stochastic frontier model," Journal of Econometrics, Elsevier, vol. 172(1), pages 66-76.
    • Handle: RePEc:eee:econom:v:172:y:2013:i:1:p:66-76
    DOI: 10.1016/j.jeconom.2012.08.021
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    References listed on IDEAS

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    More about this item

    Keywords

    Full efficiency; Zero-inefficiency; Mixture; Banking;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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