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Modelling Technical Efficiency in Cross Sectionally Dependent Stochastic Frontier Panels

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JournalJournal of Applied Econometrics
DateE-pub ahead of print - 11 Jan 2015
DatePublished (current) - Jan 2016
Issue number1
Volume31
Number of pages17
Pages (from-to)281-297
Early online date11/01/15
Original languageEnglish

Abstract

This paper proposes a unified framework for accommodating both time- and cross-section dependence in modelling technical efficiency in stochastic frontier models by combining the exogenously driven factor-based approach and an endogenous threshold efficiency regime selection mechanism. This approach is able to deal with both weak and strong CSD in a flexible manner. Using the dataset of 26 OECD countries over 1970-2010, we provide the satisfactory estimation results for the production technology parameters and the associated efficiency ranking of individual countries. We find positive spillover effect on efficiency, supporting the hypothesis that knowledge spillover is more likely to be induced by technological proximity. Furthermore, our approach enables us to identify efficiency clubs endogenously.

    Research areas

  • Stochastic Frontier in Heterogeneous Panels, Time-Varying Efficiency, Strong and Weak Cross Sectional Dependence, Clustering, Nonlinear Panel Data Model

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