Description/Abstract
We propose a Laplace stochastic frontier model as an alternative to the traditional model with normal errors. An interesting feature of the Laplace model is that the distribution of inefficiency conditional on the composed error is constant for positive values of the composed error, but varies for negative values. Therefore, it may be ideally suited for analyzing industries with many forms on or close to the efficient frontier. A simulation study suggests that the model performs well relative to the normal-exponential model when the two-sided error is misspecified. A brief application to US Airlines is provided.
Document Type
Working Paper
Date
Spring 4-2014
Keywords
Stochastic frontier, efficient estimation, efficient frontier
Language
English
Series
Working Papers Series
Disciplines
Economics | Growth and Development | Industrial Organization | International Economics
Recommended Citation
Horrace, William C. and Parmeter, Christopher F., "A Laplace Stochastic Frontier Model" (2014). Center for Policy Research. 198.
https://surface.syr.edu/cpr/198
Accessible PDF version
Source
Local input
Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.
Included in
Growth and Development Commons, Industrial Organization Commons, International Economics Commons
Additional Information
Working paper no. 166
The authors are grateful to Peng Liu for excellent research assistance. The paper has benefited from excellent suggestions at various conferences. All errors are ours alone.