Estimation of Cost Efficiency in Non-parametric Frontier Models

Authors

  • Galina Besstremyannaya New Economic School and Institute of the Far East Studies of the Russian Academy of Sciences, 45, Skolkovskoe shosse, Moscow, 121353, Russian Federation
  • Jaak Simm Stadius Centre for Dynamical Systems, Signal Processing and Data Analytics, Belgium, B–3001, Heverlee

DOI:

https://doi.org/10.21638/spbu05.2019.101

Abstract

The paper proposes a bootstrap methodology for estimating cost efficiency in data envelopment analysis. We consider the conventional concept of Fare, Grosskopf and Lovellcost efficiency, for which our algorithm re-samples “naive” input-oriented efficiency scores, rescales original inputs to bring them to the frontier, and then re-estimates cost efficiency scores for the rescaled inputs. Next, we examine Tone cost efficiency, where input prices vary across producers. Here we show that the direct modification on bootstrap algorithms by Simar and Wilson are applicable. We consider cases both with the absence and presence of environmental variables (i.e. input variables not directly controlled by firms). The bootstrap methodology exploits these assumptions: 1) the sample are i.i.d. random variables with the continuous joint probability density function with support over production set; 2) the frontier is smooth; and 3) the probability of observing firms on the frontier approaches unity with an increase in sample. The results of simulations for a multi-input, multi-output Cobb–Douglas production function with correlated outputs, and correlated technical and cost efficiency, show consistency of our proposed algorithm, even for small samples. Finally, we offer real data estimates for the Japanese banking industry in 2013. Our package “rDEA,” developed in the R language, is available from the GitHub and CRAN repository.

Keywords:

bootstrap, price efficiency, border analysis, banking

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References


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Published

2019-05-20

How to Cite

Besstremyannaya, G., & Simm, J. (2019). Estimation of Cost Efficiency in Non-parametric Frontier Models. St Petersburg University Journal of Economic Studies, 35(1), 3–21. https://doi.org/10.21638/spbu05.2019.101

Issue

Vol. 35 No. 1 (2019)

Section

Macro and Microeconomic Research

License

Articles of the St Petersburg University Journal of Economic Studies are open access distributed under the terms of the License Agreement with Saint Petersburg State University, which permits to the authors unrestricted distribution and self-archiving free of charge.