Lecture 10-2005

# Lecture 10-2005 - Stochastic Error Functions I: Another...

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1 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.

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Lecture 10-2005 - Stochastic Error Functions I: Another...

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