Modeling dependence in two-tier stochastic frontier models

Posted: July 14, 2021 in Research, Research papers
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This paper just got aired on the website of Journal of Productivity Analysis, https://doi.org/10.1007/s11123-021-00611-2. It is jointly written with Chris F. Parmeter and Subal Kumbhakar.

Abstract: The two-tier stochastic frontier model has seen widespread application across a range of social science domains. It is particularly useful in examining bilateral exchanges where unobserved side-specific information exists on both sides of the transaction. These buyer and seller specific informational aspects offer opportunities to extract surplus from the other side of the market, in combination also with uneven relative bargaining power. Currently, this model is hindered by the fact that identification and estimation relies on the potentially restrictive assumption that these factors are statistically independent. We present three different models for empirical application that allow for varying degrees of dependence across these latent informational/bargaining factors.

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