Efficient frontier estimation: a maximum entropy approach

Efficient frontier estimation: a maximum entropy approach

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Article ID: iaor20097217
Country: Netherlands
Volume: 30
Issue: 3
Start Page Number: 213
End Page Number: 221
Publication Date: Dec 2008
Journal: Journal of Productivity Analysis
Authors: , ,
Keywords: frontier analysis
Abstract:

An alternative efficiency estimation approach is developed utilizing generalized maximum entropy (GME). GME combines the strengths of both SFA and DEA, allowing for the estimation of a frontier that is stochastic, without making an ad hoc assumption about the distribution of the efficiency component. GME results approach SFA results as the one–sided inefficiency bounds used by GME shrink. Results similar to DEA are achieved as the bounds increase. The GME results are distributed like DEA, but yield virtually the same rankings as SFA. The results suggest that GME may provide a link between various estimators of efficiency.

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