A Birth-Death Markov Chain Monte Carlo Method to Estimate the Number of States in a State-Contingent Production Frontier Model

Preciado Arreola, J.L. and A.L. Johnson, 2015. “A Birth-Death Markov Chain Monte Carlo method to estimate the number of states in a state-contingent production frontier model.” American Journal of Agricultural Economics 97(4): 1267–1285.

43 Pages Posted: 12 Jun 2014 Last revised: 23 Feb 2018

Multiple version iconThere are 2 versions of this paper

Date Written: June 10, 2014

Abstract

This article estimates a state-contingent production frontier for a group of farms while endogenously estimating the number of states of nature induced by unobserved environmental variables. This estimation is conducted by using a Birth-Death Markov Chain Monte Carlo method. State-contingent output is estimated conditioned on an observed input vector and an a priori unknown number of unobserved states, each of which is modeled as a component of a mixture of Gaussian distributions. In a panel data application, state-independent dummy variables are used to control for time effects. The model is applied to 44 rice farms in the Philippines operating between 1990 and 1997. The endogenous estimation procedure indicates a unimodal posterior probability distribution on the number of states with a median of three states. The estimated posterior coefficient values and their economic implications are compared to those of previous work, which had assumed a fixed number of states determined exogenously. Goodness of fit testing is performed for the first time for a state-contingent production model. The results indicate satisfactory fit and also provided insights regarding the degree of estimation error reduction achieved by utilizing a distribution for the number of states instead of a point estimate. All of our models show significant improvement in terms of Mean Squared Error of in-sample predictions against previous work. This application also demonstrated that the use of a state-independent dummy time trend, instead of a state-contingent linear time trend, led to slightly smaller differences in state mean output levels, although input-elasticities remain state-contingent.

Keywords: BDMCMC, Bayesian SFA, Stochastic Frontier Analysis, State-contingent production

Suggested Citation

Preciado Arreola, Jose and Johnson, Andrew L, A Birth-Death Markov Chain Monte Carlo Method to Estimate the Number of States in a State-Contingent Production Frontier Model (June 10, 2014). Preciado Arreola, J.L. and A.L. Johnson, 2015. “A Birth-Death Markov Chain Monte Carlo method to estimate the number of states in a state-contingent production frontier model.” American Journal of Agricultural Economics 97(4): 1267–1285., Available at SSRN: https://ssrn.com/abstract=2448542 or http://dx.doi.org/10.2139/ssrn.2448542

Jose Preciado Arreola

Texas A&M University ( email )

Department of Industrial Engineering
College Station, TX 77843
United States

Andrew L Johnson (Contact Author)

Texas A&M University ( email )

4033 Emerging Technologies Building
College Station, Texas 77843-3131
College Station, TX 77843-4353
United States

HOME PAGE: http://www.andyjohnson.guru

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