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Regularized conditional estimators of unit inefficiency in stochastic frontier analysis, with application to electricity distribution market
Jönköping University, Jönköping International Business School, JIBS, Statistics. Department of Global Public Health, Karolinska Institutet, Stockholm, Sweden.ORCID iD: 0000-0003-2733-4441
Jönköping University, Jönköping International Business School, JIBS, Statistics. Jönköping University, Jönköping International Business School, JIBS, Centre for Entrepreneurship and Spatial Economics (CEnSE).ORCID iD: 0000-0002-4535-3630
Jönköping University, Jönköping International Business School, JIBS, Statistics.ORCID iD: 0000-0003-3144-2218
Halmstad University, Halmstad, Sweden; Ratio Institute, Stockholm, Sweden; Centre for Applied Energy Economics and Policy Research, Griffith University, Brisbane, QLD, Australia.
2023 (English)In: Journal of Productivity Analysis, ISSN 0895-562X, E-ISSN 1573-0441, Vol. 59, p. 79-97Article in journal (Refereed) Published
Abstract [en]

In stochastic frontier analysis, the conventional estimation of unit inefficiency is based on the mean/mode of the inefficiency, conditioned on the composite error. It is known that the conditional mean of inefficiency shrinks towards the mean rather than towards the unit inefficiency. In this paper, we analytically prove that the conditional mode cannot accurately estimate unit inefficiency, either. We propose regularized estimators of unit inefficiency that restrict the unit inefficiency estimators to satisfy some a priori assumptions, and derive the closed form regularized conditional mode estimators for the three most commonly used inefficiency densities. Extensive simulations show that, under common empirical situations, e.g., regarding sample size and signal-to-noise ratio, the regularized estimators outperform the conventional (unregularized) estimators when the inefficiency is greater than its mean/mode. Based on real data from the electricity distribution sector in Sweden, we demonstrate that the conventional conditional estimators and our regularized conditional estimators provide substantially different results for highly inefficient companies.

Place, publisher, year, edition, pages
Springer, 2023. Vol. 59, p. 79-97
Keywords [en]
Uncertainty modelling, Productivity, Regularized Estimators, Constrained Estimators, Conditional Estimators
National Category
Economics Mathematical Analysis
Identifiers
URN: urn:nbn:se:hj:diva-59105DOI: 10.1007/s11123-022-00651-2ISI: 000894403900001Scopus ID: 2-s2.0-85143340899Local ID: HOA;;846720OAI: oai:DiVA.org:hj-59105DiVA, id: diva2:1717058
Available from: 2022-12-07 Created: 2022-12-07 Last updated: 2023-02-20Bibliographically approved

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Zeebari, ZanginMånsson, KristoferSjölander, Pär

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