Estimating a mixture of stochastic frontier regression models via the em algorithm: A multiproduct cost function application |
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Authors: | Steven B Caudill |
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Institution: | (1) Department of Economics, Auburn University, Auburn University, AL 36849 (e-mail: SCAUDILL@BUSINESS.AUBURN.EDU), AL |
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Abstract: | Researchers have become increasingly interested in estimating mixtures of stochastic frontiers. Mester (1993), Caudill (1993),
and Polachek and Yoon (1987), for example, estimate stochastic frontier models for different regimes, assuming sample separation
information is given. Building on earlier work by Lee and Porter (1984), Douglas, Conway, and Ferrier (1995) estimate a stochastic
frontier switching regression model in the presence of noisy sample separation information. The purpose of this paper is to
extend earlier work by estimating a mixture of stochastic frontiers assuming no sample separation information. This case is more likely to occur in practice than even noisy sample separation information.
In order to estimate a mixture of stochastic frontiers with no sample separation information, an EM algorithm to obtain maximum
likelihood estimates is developed. The algorithm is used to estimate a mixture of stochastic (cost) frontiers using data on
U.S. savings and loans for the years 1986, 1987, and 1988. Statistical evidence is found supporting the existence of a mixture
of stochastic frontiers.
First version received: 3/13/01/Final version received: 6/17/02
RID="*"
ID="*" I am grateful to Ram Acharya, Janice Caudill, and especially James R. Barth for several helpful comments on an earlier
version of the paper. During the revision process I benefitted greatly from the suggestions of the Associate Editor and three
anonymous referees. |
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Keywords: | : Mixture model Stochastic frontier efficiency |
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