Technical and Allocative Inefficiency in Production Systems: A Vine Copula Approach

Dependence Modeling, Forthcoming

23 Pages Posted: 9 Aug 2021 Last revised: 22 Apr 2022

See all articles by Jian Zhai

Jian Zhai

University of Sydney

Artem Prokhorov

University of Sydney Business School; Saint Petersburg State University - Center for Econometrics and Business Analytics (CEBA); University of Montreal - Centre interuniversitaire de recherche en ├ęconomie quantitative (CIREQ)

Robert James

The University of Sydney

Date Written: April 11, 2022

Abstract

Modelling the error terms in stochastic frontier models of production systems requires multivariate distributions with certain characteristics. We argue that canonical vine copulas offer a
natural way to model the pairwise dependence between the two main error types that arise in
production systems with multiple inputs. We introduce a vine copula construction that permits
dependence between the magnitude (but not the sign) of the errors. Using a recently proposed
family of copulas we show how to construct a simulated likelihood based on C-vines. We discuss
issues that arise in estimation of such models and outline why such models better reflect the
dependencies that arise in practice. Monte Carlo simulations and a classic empirical application
to electricity generation plants illustrate the utility of the proposed approach.

Keywords: Vine copulas, Allocative inefficiency, Technical inefficiency, Production Functions

JEL Classification: C13

Suggested Citation

Zhai, Jian and Prokhorov, Artem and James, Robert, Technical and Allocative Inefficiency in Production Systems: A Vine Copula Approach (April 11, 2022). Dependence Modeling, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3889783 or http://dx.doi.org/10.2139/ssrn.3889783

Jian Zhai

University of Sydney ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Artem Prokhorov (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Saint Petersburg State University - Center for Econometrics and Business Analytics (CEBA) ( email )

7-9, Universitetskaya nab.
Saint Petersburg, 199034
Russia

University of Montreal - Centre interuniversitaire de recherche en ├ęconomie quantitative (CIREQ) ( email )

3150, rue Jean-Brillant
Montreal, QC H3T 1N8
Canada

Robert James

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
165
PlumX Metrics