A Recursive Thick Frontier Approach to Estimating Production Efficiency

19 Pages Posted: 8 May 2006

See all articles by Rien Wagenvoort

Rien Wagenvoort

European Investment Bank

Paul Schure

University of Victoria - Economics

Abstract

We introduce a new panel data estimation technique for production and cost functions, the recursive thick frontier approach (RTFA). RTFA has two advantages over existing econometric frontier methods. First, technical inefficiency is allowed to be dependent on the explanatory variables of the frontier model. Secondly, RTFA does not hinge on distributional assumptions on the inefficiency component of the error term. We show by means of simulation experiments that RTFA outperforms the popular stochastic frontier approach and the 'within' ordinary least squares estimator for realistic parameterizations of a productivity model. Although RTFAs formal statistical properties are unknown, we argue, based on these simulation experiments, that RTFA is a useful complement to existing methods.

Suggested Citation

Wagenvoort, Rien and Schure, Paul, A Recursive Thick Frontier Approach to Estimating Production Efficiency. Oxford Bulletin of Economics & Statistics, Vol. 68, No. 2, pp. 183-201, April 2006, Available at SSRN: https://ssrn.com/abstract=889817 or http://dx.doi.org/10.1111/j.1468-0084.2006.00158.x

Rien Wagenvoort (Contact Author)

European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Paul Schure

University of Victoria - Economics ( email )

Victoria V8W Y2Y, BC
Canada

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