A Proportional Scale-Invariant Measurement of Heterogeneous Directional Distances to the Technological Frontier

36 Pages Posted: 6 Nov 2017

See all articles by Emir Malikov

Emir Malikov

University of Nevada, Las Vegas

Efthymios G. Tsionas

Athens University of Economics and Business - Department of Economics

Diego A. Restrepo-Tobon

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF); State University of New York (SUNY) at Binghamton - Department of Economics; EAFIT University

Date Written: November 1, 2017

Abstract

We consider a stochastic multiplicative-directional-distance-function-based formulation of the production technology in the presence of bad outputs. In contrast to the popular additive directional distance function, our approach preserves the highly desired scale invariance property of the proportional radial distance function and can easily assume popular translog specification. Our model can also meaningfully accommodate technological heterogeneity across individual firms by letting the direction in which the distance to frontier is measured be an unknown function of the firm’s idiosyncratic characteristics reflective of the heterogeneous economic environment in which it operates. To mitigate the uncertainty associated with an arbitrary choice of the direction, we rely on a data-driven selection method to determine these varying heterogeneous directional vectors for individual firms. We showcase practical advantages of the proposed model by estimating the production technology of U.S. commercial banks in the presence of undesirable non-performing loans during the 2001–2010 period.

Keywords: Bad Outputs, Commercial Banks, Efficiency, MCMC, Multiplicative Directional Distance Function, Nonperforming Loans, Productivity

JEL Classification: C11, D24, G21

Suggested Citation

Malikov, Emir and Tsionas, Efthymios (Efthymios) G. and Restrepo-Tobon, Diego A., A Proportional Scale-Invariant Measurement of Heterogeneous Directional Distances to the Technological Frontier (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=3064858 or http://dx.doi.org/10.2139/ssrn.3064858

Emir Malikov (Contact Author)

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Efthymios (Efthymios) G. Tsionas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 8203 (Phone)
+301 8203 301 (Fax)

Diego A. Restrepo-Tobon

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Medellin
Colombia

State University of New York (SUNY) at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

EAFIT University ( email )

Carrera 49 N° 7 sur – 50
Medellin, Antioquia 00000
Colombia

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