Estimation of inefficiency in stochastic frontier models: a Bayesian kernel approach

Guohua Feng, Chuan Wang, Xibin Zhang

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We propose a kernel-based Bayesian framework for the analysis of stochastic frontiers and efficiency measurement. The primary feature of this framework is that the unknown distribution of inefficiency is approximated by a transformed Rosenblatt-Parzen kernel density estimator. To justify the kernel-based model, we conduct a Monte Carlo study and also apply the model to a panel of U.S. large banks. Simulation results show that the kernel-based model is capable of providing more precise estimation and prediction results than the commonly-used exponential stochastic frontier model. The Bayes factor also favors the kernel-based model over the exponential model in the empirical application.

Original languageEnglish
Pages (from-to)1-19
Number of pages19
JournalJournal of Productivity Analysis
Volume51
Issue number1
DOIs
Publication statusPublished - 15 Feb 2019

Keywords

  • Efficiency measurement
  • Kernel density estimation
  • Markov Chain Monte Carlo
  • Stochastic distance frontier

Cite this

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Estimation of inefficiency in stochastic frontier models : a Bayesian kernel approach. / Feng, Guohua; Wang, Chuan; Zhang, Xibin.

In: Journal of Productivity Analysis, Vol. 51, No. 1, 15.02.2019, p. 1-19.

Research output: Contribution to journalArticleResearchpeer-review

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AU - Wang, Chuan

AU - Zhang, Xibin

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AB - We propose a kernel-based Bayesian framework for the analysis of stochastic frontiers and efficiency measurement. The primary feature of this framework is that the unknown distribution of inefficiency is approximated by a transformed Rosenblatt-Parzen kernel density estimator. To justify the kernel-based model, we conduct a Monte Carlo study and also apply the model to a panel of U.S. large banks. Simulation results show that the kernel-based model is capable of providing more precise estimation and prediction results than the commonly-used exponential stochastic frontier model. The Bayes factor also favors the kernel-based model over the exponential model in the empirical application.

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