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Predicting technical effciency in stochastic production frontier models in the presence of misspecification: a Monte-Carlo analysis

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  • Konstantinos Giannakas
  • Kien Tran
  • Vangelis Tzouvelekas

Abstract

This paper provides a theoretical explanation for the sensitivity of technical efficiency measures to the choice of functional specification in stochastic production frontier models. It is shown that inappropriate functional specifications translate into a misspecification in the conditional mean of the stochastic frontier regression model. This misspecification, in turn, results in estimates of technical efficiency, confidence intervals and production elasticities being biased, even asymptotically. Monte-Carlo simulations reveal that the severity of the bias depends on the functional specification and the percentage contribution of the variance of technical inefficiency to the total variance of the composed errors.

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  • Konstantinos Giannakas & Kien Tran & Vangelis Tzouvelekas, 2003. "Predicting technical effciency in stochastic production frontier models in the presence of misspecification: a Monte-Carlo analysis," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 153-161.
    • Handle: RePEc:taf:applec:v:35:y:2003:i:2:p:153-161
    DOI: 10.1080/0003684022000015964
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    2. Kumbhakar, Subal C. & Peresetsky, Anatoly & Shchetynin, Yevgenii & Zaytsev, Alexey, 2020. "Technical efficiency and inefficiency: Reassurance of standard SFA models and a misspecification problem," MPRA Paper 102797, University Library of Munich, Germany.
    3. Ravallion, Martin, 2005. "On Measuring Aggregate "Social Efficiency."," Economic Development and Cultural Change, University of Chicago Press, vol. 53(2), pages 273-292, January.
    4. Agnaza, Manawa & Agbodji, Akoété Ega, 2022. "Technical Efficiency and Production Risk of Rice Farmers in TOGO," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra, vol. 25(2), December.
    5. Quang Nguyen & Sean Pascoe & Louisa Coglan & Son Nghiem, 2021. "The sensitivity of efficiency scores to input and other choices in stochastic frontier analysis: an empirical investigation," Journal of Productivity Analysis, Springer, vol. 55(1), pages 31-40, February.

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