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Re: st: Inefficiency measures greater than one for frontier commands

From   Federico Belotti <>
Subject   Re: st: Inefficiency measures greater than one for frontier commands
Date   Mon, 22 Apr 2013 11:54:19 +0200

Dear Reut,

in the stochastic frontier framework, "inefficiency" scores ranges from 0 to infinity, while "efficiency" scores are restricted between 0 and 1 by construction since

TE = exp{-E[su|e]}  following  Jondrow et al., 1982,
TE = E{exp(s*u)|e}  following Battese and Coelli, 1988,

where s = 1 (s = -1) in the cost frontier (production frontier) case.

Hope this helps.

On Apr 21, 2013, at 2:28 AM, Reut Levi wrote:

> Dear Statalist members,
> I am using the xtfrontier command to estimate inefficiency levels for the U.S banking industry. My data comprised of information from the FFIEC Call Report for the year 2012. It is a large data set with over 29,000 observations. I broke it down by asset size in order to reduce the number of observation and also because the literature suggests that asset size peer group will produce more appropriate inefficiency measures. After breaking down the dataset, the average number of banks in each peer group data set is 650, with observations for 4 quarters, totaling in 2700 data points. All of my variable are in natural logs. 
> I am using the xtfrontier command with the options ti and cost. I then predict the inefficiency measures using predict with the option u, but some of my inefficiency predications are greater than one. How is it possible? The manual says that the inefficiency measures are restricted to be between 0 and 1. Am I doing something wrong? Or what could explain those measures greater than 1?
> I am relatively new to STATA so please take it into consideration in your response.
> Thank you very much,
> Reut
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Federico Belotti, PhD
Research Fellow
Centre for Economics and International Studies
University of Rome Tor Vergata
tel/fax: +39 06 7259 5627

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