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Stochastic Error Functions I: Another Composed Error
Lecture X
I.
Concept of the Composed Error Term
A.
To introduce the composed error term, we will begin with a cursory
discussion of technical efficiency which we develop more fully after the dual.
B.
We start with the standard production function
( )
,
ii
yf
x
β
=
where
i
y
is the level of output produced by firm
i
,
i
x
is the level of inputs
used by firm
i
and
is a vector of parameters.
1.
We begin by acknowledging that firms may not produce on the
efficient frontier
( )
,
iii
x
T
E
=
where
i
TE
denotes technical inefficiency.
2.
We assume that
1
i
TE
≤
with
1
i
TE
=
denoting a technically efficient
producer.
()
,
i
i
i
y
TE
fx
=
.
3.
The above model presents all the error between the firm’s output and
the frontier as technical inefficiency.
4.
Augmenting this model with the possibility that random shocks may
affect output that do not represent inefficiency
( ) ( )
,e
x
p
i
i
x
v
T
E
=
Where
i
v
is a random shock resulting from factors such as weather that
are outside the control of the producer.
II.
Models of technical inefficiency without random shocks.
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This note was uploaded on 07/15/2011 for the course AEB 6184 taught by Professor Staff during the Fall '09 term at University of Florida.
 Fall '09
 Staff

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