Inference in the nonparametric stochastic frontier model

Abstract

This article is the first in the literature to discuss in detail how to conduct various types of inference in the stochastic frontier model when it is estimated using nonparametric methods. We discuss a general and versatile inferential technique that allows for a range of practical hypotheses of interest to be tested. We also discuss several challenges that currently exist in this framework in an effort to alert researchers to potential pitfalls. Namely, it appears that when one wishes to estimate a stochastic frontier in a fully nonparametric framework, separability between inputs and determinants of inefficiency is an essential ingredient for the correct empirical size of a test. We showcase the performance of the test with a variety of Monte Carlo simulations.