A Monte Carlo study of ranked efficiency estimates from frontier models

A Monte Carlo study of ranked efficiency estimates from frontier models

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Article ID: iaor20125358
Volume: 38
Issue: 2
Start Page Number: 155
End Page Number: 165
Publication Date: Oct 2012
Journal: Journal of Productivity Analysis
Authors: ,
Keywords: inefficiency, Monte Carlo method, stochastic frontier, frontier analysis
Abstract:

Parametric stochastic frontier models yield firm‐level conditional distributions of inefficiency that are truncated normal. Given these distributions, how should one assess and rank firm‐level efficiency? This study compares the techniques of estimating (a) the conditional mean of inefficiency and (b) probabilities that firms are most or least efficient. Monte Carlo experiments suggest that the efficiency probabilities are easier to estimate (less noisy) in terms of mean absolute percent error when inefficiency has large variation across firms. Along the way we tackle some interesting problems associated with simulating and assessing estimator performance in the stochastic frontier model.

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