A zero inefficiency stochastic frontier model

Subal C. Kumbhakar, Christopher F. Parmeter, Efthymios G. Tsionas

Research output: Contribution to journalArticlepeer-review

36 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)66-76
Number of pages11
JournalJournal of Econometrics
Volume172
Issue number1
DOIs
StatePublished - Jan 2013

Keywords

  • Banking
  • Full efficiency
  • Mixture
  • Zero-inefficiency

ASJC Scopus subject areas

  • Economics and Econometrics

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