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Constraints in models of production and cost via slack-based measures

Author

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  • Caroline Khan

    (King Abdulaziz University)

  • Mike G. Tsionas

    (Montpellier Business School
    Lancaster University Management School)

Abstract

In this paper, we propose the use of stochastic frontier models to impose theoretical regularity constraints (like monotonicity and concavity) on flexible functional forms. These constraints take the form of inequalities involving the data and the parameters of the model. We address a major concern when statistically endogenous variables are present in these inequalities. We present results with and without endogeneity in the inequality constraints. In the system case (e.g., cost-share equations) or more generally, in production function-first-order conditions case, we detect an econometric problem which we solve successfully. We provide an empirical application to US electric power generation plants during 1986–1997, previously used by several authors.

Suggested Citation

  • Caroline Khan & Mike G. Tsionas, 2021. "Constraints in models of production and cost via slack-based measures," Empirical Economics, Springer, vol. 61(6), pages 3347-3374, December.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:6:d:10.1007_s00181-020-02013-z
    DOI: 10.1007/s00181-020-02013-z
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    References listed on IDEAS

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