Document Type

Working Paper

Date

Spring 4-2014

Keywords

Stochastic frontier, efficient estimation, efficient frontier

Language

English

Disciplines

Economics | Growth and Development | Industrial Organization | International Economics

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.

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.

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Source

Local input

Creative Commons License

Creative Commons Attribution 3.0 License
This work is licensed under a Creative Commons Attribution 3.0 License.

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