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Lecture 10-2005

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

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Stochastic Error Functions I: Stochastic Error Functions I: Another Composed Error Another Composed Error Lecture X Lecture X

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Fall 2005 Fall 2005 Lecture X 2 Concept of the Composed Error Concept of the Composed Error To introduce the composed error term, we will begin with a cursory discussion of technical efficiency which we develop more fully after the dual.
Fall 2005 Fall 2005 Lecture X 3 We start with the standard production function We begin by acknowledging that firms may not produce on the efficient frontier ( 29 , i i y f x β = ( 29 , i i i y f x TE β =

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Fall 2005 Fall 2005 Lecture X 4 – We assume that TE i ≤ 1 with TE i = 1 denoting a technically efficient producer. The above model presents all the error between the firm’s output and the frontier as technical inefficiency. ( 29 , i i i y TE f x β =
Fall 2005 Fall 2005 Lecture X 5 The above model presents all the error between the firm’s output and the frontier as technical inefficiency. Augmenting this model with the possibility that random shocks may affect output that do not represent inefficiency ( 29 ( 29 , exp i i i i y f x v TE β =

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Fall 2005 Fall 2005 Lecture X 6 Models of technical inefficiency Models of technical inefficiency without random shocks.
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Lecture 10-2005 - Stochastic Error Functions I Another...

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