Estimating variable returns to scale production frontiers with alternative stochastic assumptions

Abstract

Two stochastic production frontier models are formulated within the generalized production function framework popularized by Zellner and Revankar (Rev. Econ. Stud. 36 (1969) 241) and Zellner and Ryu (J. Appl. Econometrics 13 (1998) 101). This framework is convenient for parsimonious modeling of a production function with returns to scale specified as a function of output. Two alternatives for introducing the stochastic inefficiency term and the stochastic error are considered. In the first the errors are added to an equation of the form h(logy,θ)=logf(x,β) where y denotes output, x is a vector of inputs and (θ,β) are parameters. In the second the equation h(logy,θ)=logf(x,β) is solved for lo..