Frontier Estimation and Firm-Specific Inefficiency Measures in the Presence of Heteroscedasticity

The purpose of this article is to illustrate a straightforward and useful method for addressing the problem of heteroscedasticity in the estimation of frontiers. A heteroscedastic cost-frontier model is developed and estimated using bank cost data similar to that used by Ferrier and Lovell. Our resu...

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Bibliographic Details
Published in:Journal of business & economic statistics 1995-01, Vol.13 (1), p.105-111
Main Authors: Caudill, Steven B., Ford, Jon M., Gropper, Daniel M.
Format: Article
Language:English
Subjects:
Bank costs
Bank loans
Banks
Cost efficiency
Cost estimates
Cost estimation models
Cost functions
Economic models
Heteroscedastic inefficiency
Installment loans
Mathematical independent variables
Maximum likelihood estimation
Production costs
Statistics
Stochastic frontier
Stochastic processes
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Summary:The purpose of this article is to illustrate a straightforward and useful method for addressing the problem of heteroscedasticity in the estimation of frontiers. A heteroscedastic cost-frontier model is developed and estimated using bank cost data similar to that used by Ferrier and Lovell. Our results show dramatic changes in the estimated cost frontier and in the inefficiency measures when accounting for heteroscedasticity in the estimation process. We find that the rankings of firms by their inefficiency measures is affected markedly by the correction for heteroscedasticity but not by alternative distributional assumptions about the one-sided error term.
ISSN:0735-0015
1537-2707
DOI:10.1080/07350015.1995.10524583