Handling Losses in Translog Profit Models

Abstract

In this paper, we compare standard approaches used to handle losses in logarithmic stochastic profit frontier models with a simple novel approach. We discuss discriminatory power, rank stability and precision of profit efficiency scores. Our new method enhances rank stability and discriminatory power, and improves the precision of profit efficiency scores.

Keywords: profit efficiency, stochastic frontier analysis, truncation and censoring

JEL Classification: G21, C24