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


From   Federico Belotti <f.belotti@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Stochastic Frontier Analysis, time-varying effects cost frontier
Date   Thu, 16 May 2013 15:27:09 +0200

On May 16, 2013, at 2:08 PM, Alexander wrote:

> Yes, I do have a balanced panel data and dummies sum to 1 within a set
> being perfectly collinear forming the trap, but I don't know if there
> is another way of incorporating this in the model.
> 
> I have 3 sets of dummy variables.
> 
> The first one consists of 3 variables relating to size (e.g. small,
> mid and large).
> 
> The second one consists of 4 variables relating to location.
> 
> The third one consists of 3 variables relating to corporate governance.
> 

In order to avoid the perfect multicollinearity, the simplest approach in your case 
is to omit three dummy variables, one from each set of dummies. Note that you must 
not omit intercept in this case. The categories that have been omitted will then represent 
your reference group and interpretation of the "inefficiency equation" estimated coefficients 
will follow the conventional one.

> Therefore I have in total 10 dummy variables and I would like to
> separately explore the effects of size, location and corporate
> governance in the frontier (e.g. performance of small vs mid vs large
> or performance of centrally-located vs non-centrally vs
> remotely-located or advanced vs non-advanced corporate governance
> practices).
> 
> Best regards,
> Alex

Best,
Federico

> 
> 
> 
> 
> 
> 
> On Thu, May 16, 2013 at 3:17 PM, Federico Belotti <f.belotti@gmail.com> wrote:
>> While I perfectly agree with Nick, I would like to be sure that your problem is not the dummy variables trap. What do you mean for "...(one from each set)..."?
>> 
>> Federico
>> 
>> On May 16, 2013, at 12:57 PM, Nick Cox wrote:
>> 
>>> The implication seems to be that Stata [sic] is being awkward or
>>> difficult here, but it can hardly do otherwise.
>>> 
>>> The best answer, I think, is to include only those indicator variables
>>> whose coefficients you want to talk about substantively. This can be
>>> regarded as an example of a more general principle, not to use a model
>>> you don't understand.
>>> 
>>> Nick
>>> njcoxstata@gmail.com
>>> 
>>> 
>>> On 16 May 2013 11:50, Alexander <alex.lee.kotra@gmail.com> wrote:
>>>> Dear Federico,
>>>> 
>>>> Thanks for your reply.
>>>> 
>>>> I have several firm types measures represented with several sets of
>>>> dummy variables
>>>> 
>>>> When trying to implement the -emean option, should I include all these
>>>> dummies all at once? Or should I run them separately?
>>>> 
>>>> If I do the former, STATA omits several dummies (one from each set)
>>>> because of collinearity and I am not sure as to how to interpret the
>>>> results.
>>>> 
>>>> 
>>>> Best regards,
>>>> Alex
>>>> 
>>>> 
>>>> On Mon, May 13, 2013 at 3:51 PM, Federico Belotti <f.belotti@gmail.com> wrote:
>>>>> 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).
>>>>> 
>>>>> hth
>>>>> Federico
>>>>>> 
>>>>>> 
>>>>>> Thank you,
>>>>>> 
>>>>>> Best regards
>>>>>> Alexander Lee
>>>>>> *
>>>>>> *   For searches and help try:
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>>>>>> *   http://www.stata.com/support/faqs/resources/statalist-faq/
>>>>>> *   http://www.ats.ucla.edu/stat/stata/
>>>>> 
>>>>> --
>>>>> Federico Belotti, PhD
>>>>> Research Fellow
>>>>> Centre for Economics and International Studies
>>>>> University of Rome Tor Vergata
>>>>> tel/fax: +39 06 7259 5627
>>>>> e-mail: federico.belotti@uniroma2.it
>>>>> web: http://www.econometrics.it
>>>>> 
>>>>> 
>>>>> *
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>>>> *
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>>> *
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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
>> e-mail: federico.belotti@uniroma2.it
>> web: http://www.econometrics.it
>> 
>> 
>> *
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> *
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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
e-mail: federico.belotti@uniroma2.it
web: http://www.econometrics.it


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