Formulation and estimation of stochastic frontier production function models

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Abstract

Previous studies of the so-called frontier production function have not utilized an adequate characterization of the disturbance term for such a model. In this paper we provide an appropriate specification, by defining the disturbance term as the sum of symmetric normal and (negative) half-normal random variables. Various aspects of maximum-likelihood estimation for the coefficients of a production function with an additive disturbance term of this sort are then considered.

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This work was supported in part by NSF Grant GS-39995 (DJA). We are indebted to Takeshi Amemiya, Forrest Nelson, and Dale J. Poirier for helpful advice at various stages of the research, and to Chinbang Chung for research assistance. None of them should be held responsible for any errors that remain.

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