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EM Estimation of a Non-identifiable Stochastic Frontier Model

Arabinda Das

Abstract



The paper considers recently used truncated bivariate normal distribution that relaxes the basic assumption of independence between error components in stochastic frontier model. As shown by Bandyopadhyay and Das (2006) the model is not identifiable under a specific parametric configuration of the distribution. However, certain restriction on parameters can make it identifiable. Rather than imposing identifiability constraints on the parameters, the popularly used expectation – maximization (EM) algorithm is adopted as a general solution to estimate those parameters of the model. The performance and efficiency of the resulting estimator under EM algorithm with the restricted maximum likelihood estimator is assessed through a Monte Carlo simulation study. Finally, an illustration is provided by applying the model with this estimation procedure to the US electricity utility data.

Keywords


Stochastic frontier model, Skew-normal distribution, Identification, EM algorithm, Monte Carlo simulation.

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