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Paper No. 09-27

Download 09-27

A Carta and MFJ Steel

Modelling Multi-output stochastic frontiers using copulas

Abstract: The aim of this work is to introduce a new econometric methodology for multi-output production frontiers. In the context of a system of frontier equations, we use a flexible multivariate distribution for the inefficiency error term. This multivariate distribution is constructed through a copula function which allows for separate modelling of the marginal inefficiency distributions and the dependence. We pay specific attention to the elicitation of a sensible (improper) prior and provide a simple sufficient condition for posterior propriety. Inference is conducted through a Markov chain Monte Carlo sampler. We use Bayes factors to compare various copula specifications in the empirical context of Dutch dairy farm data, with two outputs. JEL classification: C11,C15,C23,D24.

Keywords: Bayes factor; Dairy farms; Efficiency; Existence of posterior; Prior elicitation.