Estimation of technical inefficiency effects using panel data and doubly heteroscedastic stochastic production frontiers

In previous studies, measures of technical inefficiency effects derived from stochastic production frontiers have been estimated from residuals which are sensitive to specification errors. This study corrects for this inaccuracy by extending the doubly heteroscedastic stochastic cost frontier suggested by Hadri (1999) to the model for technical inefficiency effects. This model is a stochastic frontier production function for panel data as proposed by Battese and Coelli (1995). The study uses, for illustration of the techniques, data on 101 mainly cereal farms in England. We find that the correction for heteroscedasticity is supported by the data. Both point estimates and confidence intervals for technical efficiencies are provided. The confidence intervals are constructed by extending the “Battese-Coelli” method reported by Horrace and Schmidt (1996) by allowing the technical inefficiency to be time varying and the disturbance terms to be heteroscedastic. The confidence intervals reveal the precision of technical efficiency estimates and show the deficiencies of making inferences based exclusively on point estimates. First version received: March 2000/Final version received: Oct. 2001 RID="*" ID="*"  The authors are grateful to the Economic and Social Research Council for access to their Data Archive which has provided the data for this research. We are indebted to Badi Baltagi and two anonymous referees for their helpful comments and suggestions. The usual caveat applies.     

Scale and efficiency measurement using a semiparametric stochastic frontier model: evidence from the U.S. commercial banks

In this paper, we use the local maximum likelihood (LML) method proposed by Kumbhakar et al. (J Econom, 2007) to estimate stochastic cost frontier models for a sample of 3,691 U.S. commercial banks. This method relaxes several deficiencies in the econometric estimation of frontier functions. In particular, we relax the assumption that all banks share the same production technology and provide bank-specific measures of returns to scale and cost inefficiency. The LML method is applied to estimate the cost frontiers in which a truncated normal distribution is used to model technical inefficiency. This formulation allows the cost frontier, inefficiency effects and heteroskedasticity in both noise and inefficiency components to be quite flexible.      

Estimating the stationary distribution of a Markov chain

Summary. Let be a Markov chain with a unique stationary distribution . Let h be a bounded measurable function. Write and . This paper explores conditions for the consistency and asymptotic normality of the estimate of of assuming the existence of a solution to the Poisson equation . Our framework covers the case of nonirreducible Markov chains arising in many growth models in economics. Received: October 8, 2001; revised version: April 8, 2002 RID="*" ID="*" Thanks are due to Professors Rabi Bhattacharya, Nicholas Kiefer and Timothy Vogelsang on an earlier draft for helpful conversations, and a referee for insightful comments. Correspondence to: M.Majumdar     

Rates of return to public and private capital: new estimates using nonlinear Euler equations

Results obtained by Otto and Voss show that public investment undertaken in Australia over recent decades satisfies conditions for intertemporal efficiency. This paper confirms this result, although lower output elasticities and rates of return to private and public capital are obtained. The reason for these results is that the earlier work is extended by estimating the parameter related to the elasticity of intertemporal substitution that was earlier restricted to a specific value. In fact, it is shown here that it is possible to obtain an economically reasonable (and statistically significant) estimate of this parameter by assuming that the stochastic discount factor for the representative firm is the same as for the representative consumer and equal to a gross real interest rate.     

Bayesian estimation of social welfare and tax progressivity measures

This paper examines Bayesian methods of examining posterior distributions of inequality, concentration, tax progressivity and social welfare measures. Use is made of an explicit income distribution assumption and two alternative assumptions regarding the distribution of pre-tax mean incomes within each income group. The methods are applied to a simulated distribution of individual incomes and tax payments. It is possible to identify a minimum acceptable number of income classes to be used. The results suggest support for the use of group means in practical applications, particularly where large sample sizes are available. First version received: August 2000/Final version received: July 2001 RID="*" ID="*"  This research was supported by a Melbourne University Faculty of Economics and Commerce Research Grant. We should like to thank Bill Griffiths and two referees for comments on an earlier draft.     

Is it efficient to analyse efficiency rankings?

When production functions are estimated as frontier functions, the deviations from the frontier can be interpreted as individual inefficiency estimates. Unfortunately, it has recently been shown that efficiency differences across individuals are very often statistically insignificant. In this paper, we will analyse the consequences of the consideration of confidence statements for the reliability of efficiency rankings. The stochastic frontier and confidence intervals derived by Horrace and Schmidt are compared to the COLS approach and bootstrap confidence intervals. The membership function is proposed as a simple Monte-Carlo approximation for the probability for an individual to be the most efficient in the sample. First version received: May 1998/final version accepted: July 1999     

TECHNICAL EFFICIENCY,REGULATION AND HETEROGENEITY IN JAPANESE AIRPORTS

In this paper, the random stochastic frontier model is used to estimate the technical efficiency of Japanese airports, with regulation and heterogeneity included in the variables. The airports are ranked according to their productivity for the period 1987–2005 and homogeneous and heterogeneous variables in the cost function are disentangled. Policy implications are derived.     

New insights on earnings trends across skill groups and industries in West Germany

This paper provides an empirical analysis of the structure of earnings in West Germany across skill groups and industries. Our analysis is based on data from the German Socioeconomic Panel for the period 1984 to 1994. We estimate quantile regressions, both for the entire sample period and for each year separately, in order to obtain a finer picture of the earnings structure compared to conventional least squares methods. For robust standard error estimation, this study uses a block bootstrap procedure taking account of heteroskedasticity and autocorrelation in the error term. We also suggest a simple procedure to obtain a consistent estimate of inter-industry earnings variability. Our main findings are: first, pooled estimation comprising a uniform time trend is not rejected by the data, and second, the effects of human capital variables and industry dummies on earnings differ considerably across quantiles. First version: May 1998/Final version: April 2002 RID="*" ID="*"  We are grateful to an anonymous referee as well as to Thiess Büttner, Christian Dustmann, Wolfgang Franz, John Haisken-DeNew, Costas Meghir, Werner Smolny, Peter Winker, Volker Zimmermann, and seminar participants in Heidelberg, Kassel, Konstanz, and Paris for helpful comments. However, all errors are our sole responsibility. RID="*" ID="*"  We are grateful to an anonymous referee as well as to Thiess Büttner, Christian Dustmann, Wolfgang Franz, John Haisken-DeNew, Costas Meghir, Werner Smolny, Peter Winker, Volker Zimmermann, and seminar participants in Heidelberg, Kassel, Konstanz, and Paris for helpful comments. However, all errors are our sole responsibility.     

Maximum entropy: a stochastic frontier approach for electricity distribution regulation

The literature on incentive-based regulation in the electricity sector indicates that the size of this sector in a country constrains the choice of frontier methods as well as the model specification itself to measure economic efficiency of regulated firms. The aim of this study is to propose a stochastic frontier approach with maximum entropy estimation, which is designed to extract information from limited and noisy data with minimal statements on the data generation process. Stochastic frontier analysis with generalized maximum entropy and data envelopment analysis—the latter one has been widely used by national regulators—are applied to a cross-section data on thirteen European electricity distribution companies. Technical efficiency scores and rankings of the distribution companies generated by both approaches are sensitive to model specification. Nevertheless, the stochastic frontier analysis with generalized maximum entropy results indicate that technical efficiency scores have similar distributional properties and these scores as well as the rankings of the companies are not very sensitive to the prior information. In general, the same electricity distribution companies are found to be in the highest and lowest efficient groups, reflecting weak sensitivity to the prior information considered in the estimation procedure.

     

Large lending and banks performance. Is there any relationship? Empirical evidence from US banks

Large lending in the banking industry has sparked concerns about banks’ efficiency performance, particularly, if it is related to their credit risk, as trade credit, provided by large, creditworthy firms. We provide evidence of a rather neglected issue regarding the impact of large lending on banks’ efficiency using cost and profit stochastic functions. A unique dataset was constructed concerning all US banks collected from the Statistics on Depository Institutions report compiled by the Federal Deposit Insurance Corporation. Our sample contains US banks tracked yearly for the period 2010–2017, creating an unbalanced panel of year observations. An econometric framework based on nested non-neutral frontiers was developed to estimate the influence and the decomposition of large lending on the three banks’ performance aspects. Moreover, different types of frontiers aiming at the cost and profit sides have been investigated, and the associated elasticities have been calculated. We notice that large lending plays a crucial role in banks’ technical efficiency. Variations among different frontier models, type of bank and size, banks’ ownership structure, and macroeconomic conditions appear to be present. By considering all capital adequacy asset quality management earnings liquidity parameters, we notice that banks’ financial strength affects banks’ efficiency.     

Stochastic convexity in dynamic programming

Summary. This paper explores sufficient conditions for a continuous stationary Markov optimal policy and a concave value function in stochastic dynamic programming problems. Also, the paper addresses conditions needed for the differentiability of the value function. The paper uses conditions such as first order stochastic dominance, second order stochastic dominance and concave stochastic dominance that are widely applied in economics. Received: February 23, 2001; revised version: May 19, 2002 RID="*" ID="*" I am deeply indebted to Prajit Dutta for patient assistance and advice. This paper has benefited from discussions with Tsz Cheong Lai, Tackseung Jun, Werner Stanzl and Satyajit Bose as well as feedback from an anonymous referee.     

Robust estimation of models of Engel curves

Both standard and robust methods are used here to estimate models of Engel curves for three household commodities, namely, food, transport, and tobacco and alcohol in Canada. The income elasticities of demand computed from the various methods differ significantly for the transport and tobacco-alcohol consumption where there are obvious outliers and zero expenditures problem. Robust estimators point to lower income elasticities and have better performance than the standard LS and Tobit estimator. These results are analyzed in the light of the information on finite-sample performance obtained in a previous Monte Carlo study. First version received: July 2000/Final version received: July 2001 RID="*" ID="*"  I wish to thank Victoria Zinde-Walsh, John Galbraith, Clint Coakley, two anonymous referees and an associate editor for helpful comments. I would also like to thank Anastassia Khouri for kindly providing the 1992 Family Expenditure Survey of Canada data.     

Technical efficiency analysis correcting for biases from observed and unobserved variables: an application to a natural resource management project

This article brings together the stochastic frontier framework with impact evaluation methodology to compare technical efficiency (TE) across treatment and control groups using cross-sectional data associated with the MARENA Program in Honduras. A matched group of beneficiaries and control farmers is determined using propensity score matching techniques to mitigate biases stemming from observed variables. In addition, possible self-selection arising from unobserved variables is addressed using a selectivity correction model for stochastic frontiers recently introduced by Greene (J Prod Anal 34:15?C24, 2010). The results reveal that average TE is consistently higher for beneficiary farmers than the control group while the presence of selectivity bias cannot be rejected. TE ranges from 0.67 to 0.75 for beneficiaries and from 0.40 to 0.65 for the control depending on whether biases were controlled or not. The TE gap between beneficiaries and control farmers decreases by implementing the matching technique and the sample selection framework decreases this gap even further. The analysis also suggests that beneficiaries do not only exhibit higher TE but also higher frontier output.     

Pooling surveys in the estimation of income and price elasticities: An application to Tunisian households

This paper presents a methodological extension of Deaton's (1990) model for estimating price elasticities, by pooling Tunisian data from several surveys to improve the inter-cluster variability of unit values which is one of the key elements used in the derivation of these elasticities. Since the surveys cover a relatively long period, possible structural changes in consumption behaviour occurring over time are accounted for by postulating that certain response coefficients of the basic model vary from one survey to the other. The own price and cross price elasticities calculated using appropriate estimates of the extended model are satisfactory both from the economic point of view of their sign and the statistical point of view of their significance and superior to those obtained using a single survey. First version received: April 2000/Final version received: June 2001 RID="*" ID="*"  The authors would like to thank Angus Deaton and anonymous referees for useful comments and suggestions.     

Inflation-unemployment tradeoff and regional labor market data

We estimate a linear and a piecewise linear Phillips curve model with regional labor market data for West German and Neue L?nder. Employing regional observations allows us to country difference the data. This eliminates, under the assumption of homogeneous L?nder, supply shocks and changes in the formation of expectations as possible identification failures. With seemingly unrelated regressions we find a flat Phillips curve in the Neue L?nder. For the West German L?nder a piecewise linear model with a higher inflation-unemployment tradeoff for the regime of low unemployment rates fits the data very well. The results hold true if we control for endogeneity of the unemployment rate. With a kinked but upward sloping aggregate supply curve there seems to be room for stabilization policies, at least in the range of aggregate demand shifts that our data covers. First version received: December 2000/Final version accepted: Jan. 2002 RID="*" ID="*"  An earlier version of this paper was written while the second author was at Universidad Carlos III in Madrid. He thanks Juan Dolado and is grateful for financial support by the TMR Program on New Approaches for the Study of Economic Fluctuations. He would also like to thank Bertrand Koebel for his critique on that earlier version. Both authors are grateful to an editor and three anonymous referees for very helpful comments. Moreover, we wish to thank participants of the seminar on Quantitative Wirtschaftsforschung by Jürgen Wolters and Peter Kuhbier, Freie Universit?t Berlin. Finally we profited from discussions with participants at the conferences of the European Economic Association in Lausanne and the Verein für Socialpolitik in Magdeburg where the paper was presented. Of course, all errors are to our sole responsibility.     

Decomposition of total factor productivity in world health production: a stochastic frontier approach

While countries around the globe have increased spending on health care, economists and policy makers have raised concerns over the productivity and efficiency of health care. This article applies a stochastic frontier approach to address this issue using data from 141 countries for the period 1993 to 1997. From the perspective of productivity change, our results suggest that gains in population health will be greater provided that more resources are allocated to investment in human capital. We also show that the scale component accounts for 65–70% of the productivity change. That is, omitting the scale component in our case will result in a significant underestimation of the decline in the productivity of world health production. We do not find evidence supporting the hypothesis that production frontiers differ between Organization for Economic Cooperation and Development (OECD) and non-OECD countries. However, the change in productivity and scale elasticity do vary significantly between these countries.     

Mixed equilibria in games of strategic complementarities

Summary. The literature on games of strategic complementarities (GSC) has focused on pure strategies. I introduce mixed strategies and show that, when strategy spaces are one-dimensional, the complementarities framework extends to mixed strategies ordered by first-order stochastic dominance. In particular, the mixed extension of a GSC is a GSC, the full set of equilibria is a complete lattice and the extremal equilibria (smallest and largest) are in pure strategies. The framework does not extend when strategy spaces are multi-dimensional. I also update learning results for GSC using stochastic fictitious play. Received: October 16, 2000; revised version: March 7, 2002 RID="*" ID="*" I am very grateful to Robert Anderson, David Blackwell, Aaron Edlin, Peter De Marzo, Ted O'Donoghue, Matthew Rabin, Ilya Segal, Chris Shannon, Clara Wang and Federico Weinschelbaum for comments and advise.     

Probability of survival in a random exchange economy with dependent agents

Summary. In this paper I analyze the general equilibrium in a random Walrasian economy. Dependence among agents is introduced in the form of dependency neighborhoods. Under the uncertainty, an agent may fail to survive due to a meager endowment in a particular state (direct effect), as well as due to unfavorable equilibrium price system at which the value of the endowment falls short of the minimum needed for survival (indirect terms-of-trade effect). To illustrate the main result I compute the stochastic limit of equilibrium price and probability of survival of an agent in a large Cobb-Douglas economy. Received June 7, 2001; revised version: January 7, 2002 RID="*" ID="*" I would like to thank Mukul Majumdar and Thomas DiCiccio for helpful discussion and an anonymous referee for valuable comments and suggestions.     

Does ownership affect firms’ efficiency? Panel data evidence on Italy

This paper provides empirical evidence on the relation between the identity of ultimate owners and technical (in)efficiency by estimating stochastic production frontiers on Italian firm level panel data for twelve manufacturing industries over the 1978–93 period. Privately-owned independent firms are used as reference group and their efficiency is assessed against three alternative forms of ownership: subsidiaries of (privately owned) national business groups, subsidiaries of foreign multinationals, and state owned firms. Even if cross-industry differences obviously exist a common pattern can however be identified. Overall, subsidiaries of foreign multinationals (state owned firms) are found to be more (less) efficient than the reference group. On the contrary, no systematic difference is found between independent firms and subsidiaries of national business groups.First version received: July 2002/Final version received: September 2003We wish to thank the Editor Robert Kunst, a very constructive Referee, Luigi Benfratello, Maurizio Conti, Almas Heshmati, Giovanna Nicodano and the participants at the EARIE conference in Lausanne for helpful comments on a previous draft.     

The effects of shocks on the Austrian unemployment rate – a structural VAR approach

Assuming full hysteresis in the Austrian labour market, a simple macroeconomic framework is used to model the effect of four structural shocks, i.e. shocks to productivity, demand, wages and labour supply. By using SVAR analysis, we derive impulse-response functions that show the effects of these shocks on unemployment. What constitutes a distinctive feature of our study is the deliberate use of overidentifying restrictions, allowing for a likelihood ratio test. The objection to SVAR methodology, that it relies on arbitrary assumptions, can thus be overcome, as invalid sets of identifying restrictions are rejected. First version received: September 2000/Final version received: March 2002 RID="*" ID="*"  I thank Juan F. Jimeno, Martin Wagner, Helmut Hofer and Bernhard B?hm for their assistance; Robert Kunst and Martin Spitzer for their discussion of an earlier version of this paper; Thomas Sparla, Michael Roos and two anonymous referees for their helpful comments.