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Re: st: Stochastic Frontier Analysis, time-varying effects cost frontier

From   Federico Belotti <>
Subject   Re: st: Stochastic Frontier Analysis, time-varying effects cost frontier
Date   Mon, 13 May 2013 13:51:25 +0200

Dear Alexander,

my comments below 

On May 11, 2013, at 6:23 PM, Alexander Lee wrote:

> Dear Statalist members,
> Having read previous posts on the Stochastic Frontier Analysis, I
> still have questions regarding
> its implementation, particularly the so-called Battese and Coeli
> (1995) random time-varying effects
> model is of interest to me.
> My work includes a panel data on several firms, I attempt to explore
> their cost efficiency,
> change of the efficiency scores with time and the impact of the bank's
> type on efficiency (ownership,
> location, etc.). I do that with the -sfpanel command, realized in his
> paper by Prof. F. Belotti. I do
> not assume heteroscedasticity neither in the inefficiency term nor in
> the error term.
> I have some questions on that and would appreciate any insights:
> 1. When I implement a translog form of the frontier model, the
> iterations won't converge
> (BFGS stepping has contracted, resetting BFGS Hessian)
> I believe that all the data is properly scaled and there is a larger
> number of observations.
> I have also tried to do this with -difficult option.

> What could be a reason for this?

Did you impose linear homogeneity in inputs' prices? It is worth noting that such a flexible functional form could be very difficult to estimate, especially in a cost frontier framework.

> 2. If I could estimate the Stochastic Frontier model, which includes
> total costs as dependant
> variable and input prices and outputs as regressors and obtain the
> efficiency scores, I fail to
> understand how the firm types should be accounted for in this
> one-stage model? Should they simply
> be included in the frontier model as new (dummy) variables? However in
> the original 1995 paper I
> could see that firms' effects are included in a separate Inefficiency
> Model, does that mean that the
> inefficiencies obtained from the frontier should be regressed on firm
> types in a separate exercise?

-sfpanel- allows to estimate the Battese and Coelli (1995) model using the following syntax

sfpanel c y p1 p2, cost model(bc95) emean(x1 x2) 

where the option -emean(x1 x2)- allows to simultaneously estimate the so-called inefficiency effects.
Often, the inclusion of exogenous variables to model the mean of the inefficiency could help the identification of the inefficiency term itself (increasing the convergence rate).

> Thank you,
> Best regards
> Alexander Lee
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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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