Sankhya: The Indian Journal of Statistics

1999, Volume 61, Series B, Pt. 2, pp. 337-350

A MODEL OF FPF WITH CORRELATED ERROR COMPONENETS: AN APPLICATION TO INDIAN AGRICULTURE

By

MANORANJAN PAL, Visva-Bharati, Santiniketan

and

ATANU SENGUPTA, Indian Statistical Institute, Calcutta

SUMMARY. The STOCHASTIC FRONTIER PRODUCTION FUNCTION (SFPF) models usually assume that the two components of the equation error, namely the noise variable and the inefficiency error are independently distributed. In this paper we relax this assumption. This may serve as a basis for specification test. Moreover, the marginal distribution of the inefficiency error is taken as truncated normal instead of half normal. We develop a model of SFPF introducing both technical and allocative inefficiencies under the assumption that technical efficiency error and the noise variable are bivariate normal, the technical inefficiency being truncated at zero. The allocative inefficiency errors are also correlated among themselves. We obtain the likelihood function and discuss estimation of technical and allocative inefficiencies. This is illustrated through an Indian data on agricultural farms.

AMS (1991) subject classification. 90A11, 90A19.

Key words and phrases. Stochastic frontier production function, technical and allocative efficiencies, correlated error components.

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