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Consistent Estimation of the “True” Fixed-effects Stochastic Frontier Model

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The classic stochastic frontier panel data models provide no mechanism to disentangle individual time invariant unobserved heterogeneity from inefficiency. Greene (2005a,b) proposed a fixed-effects model specification that distinguishes these two latent components and allows a time varying inefficiency distribution. However, the maximum likelihood estimator proposed by Greene leads to biased inefficiency estimates due to the incidental parameters problem. In this paper, we propose two alternative estimation procedures that, by relying on a first difference data transformation, achieve consistency for n goes to infinity with fixed T. Evidence from Monte Carlo simulations shows good finite sample performances of both approaches even in presence of small samples.

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  • Federico Belotti & Giuseppe Ilardi, 2012. "Consistent Estimation of the “True” Fixed-effects Stochastic Frontier Model," CEIS Research Paper 231, Tor Vergata University, CEIS, revised 18 Apr 2012.
    • Handle: RePEc:rtv:ceisrp:231
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    9. Xiang, C. & Huang, J., 2018. "The Roles of Exotic Wheat Germplasms in Wheat Breeding and Their Impacts on Wheat Production in China," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277017, International Association of Agricultural Economists.
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    More about this item

    Keywords

    Stochastic frontiers; Fixed-effects; Panel data; Marginal simulated likelihood; Pairwise differencing;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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