A Monte Carlo study of ranked efficiency estimates from frontier models

William C. Horrace, Seth Richards-Shubik

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)155-165
Number of pages11
JournalJournal of Productivity Analysis
Volume38
Issue number2
DOIs
StatePublished - Oct 2012

Keywords

  • Efficiency
  • Multivariate probabilities
  • Stochastic frontier
  • Truncated normal

ASJC Scopus subject areas

  • Business and International Management
  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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