Stern School of Business
New York University
Professor William. Greene
Home Page: http://people.stern.nyu.edu/wgreene
This course will present the methodology of econometric estimation of economic efficiency. We will examine the stochastic frontier model as an econometric extension of the classical microeconomic theory of production and cost at the individual producer level. Basic models for production, cost and distance will be examined. We will examine major extensions of the models to provide scope for cross firm heterogeneity (such as heteroscedasticity) as well as unobserved heterogeneity captured by the stochastic specification of the model. The second day of the course will turn to more advanced applications, such as Bayesian and classical methods of estimation and, especially, panel data models. In addition to the examination of theoretical and econometric methods, we will study several applications from the recent literature.
The course will include lectures that develop the relevant theory and extensive practical, laboratory applications. Emphasis in the laboratory sessions will be on estimation of stochastic frontier models and using them to compute measures of economic efficiency. Course participants will apply the techniques on their own computers using the LIMDEP/NLOGIT computer program and several real data sets that have been used in applications already in the literature.
Prior knowledge is assumed to include a course in microeconomics, calculus at the level assumed in the first year of a Ph.D. program in economics and a course in econometrics at the beginning Ph.D. level out of a textbook such as Greene, W., Econometric Analysis, 7th edition. Familiarity with LIMDEP will be helpful, but is not necessary.
Students in this course will obtain background in both the theory and methods of estimation for stochastic frontier modeling. This course will provide a gateway to the professional literature as well as practical application of the methods at the level of the contemporary research in the field.
Students are assumed to have had a previous course in Econometrics at the graduate level, using a text at the level of Greene, W., Econometric Analysis.
This is a course in efficiency and productivity analysis. There are a huge variety of models that are used in this context. We will focus on, the fundamental normal-half normal model that began the field then examine a long list of extensions that have accommodated different situations and data. The course will consist of discussions and laboratory sessions which will apply the techniques to live data sets and some time devoted to topics, discussions and laboratory work on student projects. Discussions will cover the topics listed below. Lab sessions will apply the techniques discussed in the preceding sessions. Practicals will consist of directed exercises and student assignments to be completed singly or in groups.
No specific textbook is assigned for the course. A useful reference is
Kumbhakar, S. and K. Lovell, Stochastic Frontier Modeling, Cambridge University Press, 2000, monograph.
A foundation work that contains broad surveys of the field is
Fried, H., K. Lovell and S. Schmidt, The Measurement of Productive Efficiency and Productivity, Oxford University Press, 2007, the Red Book.
Some of the presentation will be based on Econometric Analysis, 7th ed., by Greene, W. (Prentice Hall, 2011). Some chapters are included with the course materials: Left click to activate. Right click to download
Greene, W., Econometric Analysis, 7th Ed.
The received literature on frontier models is vast - one could easily compose a list of thousands of articles. Your course materials include a small handful of survey articles:
Recent Developments and Methodology of Stochastic Frontier Analysis,Parmeter and Kumbhakar Survey
The Econometric Approach to Efficiency Estimation Greene Survey (one of the chapters in the Red Book)
Efficiency Analysis Fried, Lovell and Schmidt Survey (Chapter 1 in the Red Book)
Efficiency Analysis, Sena survey (article)
Economic Efficiency and Frontier Techniques Luis R. Murillo-Zamorano
Course Materials and Resources
I. Class Notes: These are Powerpoint slide presentations and background readings (pdf). Left click to activate. Right click to download.
Microeconomic essentials: Production functions; Functional form, Cobb-Douglas and translog; Isoquants and efficiency measures; implications for least squares estimation of production relationships
Kumbhakar and Lovell (2000 monograph)
Frontier modeling; programming estimators; The gamma frontier; modifying least squares; Data envelopment analysis
The stochastic frontier model; Implications for OLS; The half normal model; Maximum likelihood estimation; Exponential and truncated distributions; estimating inefficiency; Confidence intervals; Model specification
Production, cost and other models; Cost frontiers; Allocative inefficiency; The Greene problem; Multiple outputs; Distance functions; Profit and revenue functions
Tsionas and Kumbhakar (2005), banking industry
Review of stochastic frontier modeling; Estimating inefficiency; functional form Heterogeneity in the stochastic frontier model; model extensions; heteroscedasticity; One and two step estimation; A latent class model; Random parameters; Sample Selection
Bayesian and Maximum simulated likelihood estimation; The normal-gamma, Weibull and Rayleigh models; Discrete outcomes
Panel data; Fixed and random effects; FE and RE in the stochastic frontier model; True random and fixed effects models, spatial effects
Applications from the literature
II. Lab Exercises
Assignments: Exercises and Practicals for Stochastic Frontier Modeling. Left click to activate. Right click to download. Note there are two parts to each, the .pdf file for the assignment and the .lim file that contains the NLOGIT commands. Each will also use one or more of the data sets.
Data Sets: These are NLOGIT project (.lpj) files. Each is accompanied by a corresponding NLOGIT command (.lim) file that contains a description of the variables in the file. Left click to activate. Right click to download.
III. Program Notes: These are Powerpoint slide presentations that explain using NLOGIT and how to do the assignments with NLOGIT. Left click to activate. Right click to download.
IV. LIMDEP/NLOGIT Software:: The short introduction is a getting started. The LIMDEP manual explains the basics of using LIMDEP and NLOGIT. (LIMDEP is embedded in NLOGIT). The setup file contains an installation kit for installing a copy of NLOGIT made specially for this course on your own computer. You should download the setup file to your own computer and execute it there, rather than launching it from your web browser. Left click to activate. Right click to download.
These chapters from the LIMDEP/NLOGIT manual are specifically for frontier estimation and efficiency analysis.
These are descriptions of new
frontier and efficiency estimation tools that were added to LIMDEP and NLOGIT
New Stochastic Frontier Specifications
Extensions of the Data Envelopment Analysis Program
These are short manuals that document how to use the program:
This is the installation kit for installing the program. Download this file to your computer before you use it to install NLOGIT on your computer.