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A STOCHASTIC FRONTIER PRODUCTION FUNCTION INCORPORATING FLEXIBLE RISK PROPERTIES Guang H. Wan and George E. Battese No. 66 - June, 1992 ISSN 0 157-0188 ISBN 1 86389 018 1 A STOCKASTIC FRONTIER PRODUCTION FUNCTION + INCORPORATING FLEXIBLE RISK PROPERTIES ~* Guang H. Wan" and George E. Battese ABSTRACT This paper considers a new stochastic frontier production function which permits the marginal production risks of inputs to be negative or positive and the technical efficiency of firms to be a function of the levels of the factor inputs. Previous frontier production function models, which have specified either zero or positive marginal risks, do not permit sufficient flexibility for many empirical applications. The proposed frontier model incorporates the production risk structure, suggested by Just and Pope (1978), and the stochastic frontier production function model, proposed by Aigner, Lovell and Schmidt (1977) and Meeusen and van den Broeck (1977). ~ Maxlmum-llkellhood estimation of the parameters of the frontier production function and the prediction of technical efflciencies of firms are considered, given that cross-sectional data on sample firms are available. Paper presented at the Australasian Meeting of the Econometric Society, Monash University, Melbourne, 6-8 July 1992. Department of Agricultural Economics, University of Sydney (A04), NSW 2006, Phone: (02) 692 4814, Fax: (02) 692 2945. Department of Econometrics, University of New England, Armidale, NSW 2351, Australia. Phone: (067) 73 2795, Fax: (067) 73 3205.
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