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A penalization approach for estimating inefficiency in stochastic frontier panel models

Author

Listed:
  • Firmin Doko Tchatoka

    (The University of Adelaide)

  • Magnus Söderberg

    (Griffith University)

  • Mohammad Abbas Hakeem

    (The University of Adelaide)

Abstract

Efficiency analysis is crucial for evaluating the performance of entities that provide essential and other homogenized services. The Jondow et al.’s (1982) estimator is widely used but has been criticized for biasing inefficiency toward its mean, distorting the distribution, and misrepresenting the conditional distribution of inefficiency, particularly in cross-sectional settings. Zeebari et al. (2023) propose a regularization approach that aligns sample and theoretical moments but it is primarily suited to cross-sectional data. This paper introduces a penalized mode estimator for unit inefficiency in panel data, accounting for heteroskedasticity in both inefficiency and idiosyncratic errors. A closed-form expression for this estimator is derived, and Monte Carlo simulations demonstrate its superior performance compared to existing methods. An empirical study of electricity providers in Australia, Canada, and New Zealand further underscores its advantages.

Suggested Citation

  • Firmin Doko Tchatoka & Magnus Söderberg & Mohammad Abbas Hakeem, 2025. "A penalization approach for estimating inefficiency in stochastic frontier panel models," School of Economics and Public Policy Working Papers 2025-01 Classification-C1, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2025-01
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2025-01.pdf
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