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Empirical Economics

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11-11-2020

Maximum simulated likelihood estimation of the seemingly unrelated stochastic frontier regressions

Author: Hung-pin Lai

Published in: Empirical Economics | Issue 6/2021

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Abstract

In this paper, we use the maximum simulated likelihood (MSL) approach to estimate multiple stochastic frontier (SF) models with random effects and correlated composite errors. We show that the separate estimation of the single equation ignores the correlation between the composite errors and causes significant efficiency loss in estimation. In addition to using Monte Carlo simulation to investigate the finite sample performance of the simulated estimator, we demonstrate the usefulness of our approach in estimating the technical efficiency of Taiwan’s international hotels based on their accommodation and restaurant divisions.

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With slight abuse of notation, we abbreviate \(\sigma _{j,it}\) and \(\lambda _{j,it}\) as \(\sigma _{j}\) and \(\lambda _{j}\) to keep the notation simple.

For instance, see Cherubini et al. (2004) and Trivedi and Zimmer (2005) for the Gaussian copula density and other possible choices of copula functions.

For instance, see Greene (2003).

More details about how to generate \(\varepsilon _{it}^{1}\) and \(\varepsilon _{it}^{2}\) from the Gaussian copula can be found in Lai and Huang (2013).

See Smith (2008) for more bivariate copulas.

\(w_{1}=1\) if the total number of employees is less than 100; \(w_{1}=2\) if the total number of employees is larger than 100 and less than 200; \(w_{1}=3\) if the total number of employees is larger than 200 and less than 300; and so on. \(w_{1}=5\) if the total number of employees is more than 400.

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Title: Maximum simulated likelihood estimation of the seemingly unrelated stochastic frontier regressions
Author: Hung-pin Lai
Publication date: 11-11-2020
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 6/2021
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-020-01962-9

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