Consistent estimation of technical and allocative efficiencies for a semiparametric stochastic cost frontier with shadow input prices

Tai Hsin Huang, Kuan Chen Chen, Chien Hsiu Lin, Ming Tai Chung

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Abstract

Conventional parametric stochastic cost frontier models are likely to suffer from biased inferences due to misspecification and the ignorance of allocative efficiency (AE). To fill up the gap in the literature, this article proposes a semiparametric stochastic cost frontier with shadow input prices that combines a parametric portion with a nonparametric portion and that allows for the presence of both technical efficiency (TE) and AE. The introduction of AE and the nonparametric function into the cost function complicates substantially the estimation procedure. We develop a new estimation procedure that leads to consistent estimators and valid TE and AE measures, which are proved by conducting Monte Carlo simulations.

Original languageEnglish
Pages (from-to)307-320
Number of pages14
JournalJournal of Productivity Analysis
Volume41
Issue number2
DOIs
Publication statusPublished - Apr 2014

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Keywords

  • Allocative efficiency
  • Monte Carlo simulations
  • Semiparametric cost frontier
  • Shadow prices
  • Technical efficiency

ASJC Scopus subject areas

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

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