Modelling multi-output stochastic frontiers using copulas

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Carta, Alessandro ; Steel, Mark F. J. (2009)
  • Publisher: University of Warwick. Centre for Research in Statistical Methodology
  • Subject: QA

The aim of this work is to introduce a new econometric methodology for multi-output production frontiers. In the context of a system of frontier equations, we use\ud a flexible multivariate distribution for the inefficiency error term. This multivariate\ud distribution is constructed through a copula function which allows for separate modelling of the marginal inefficiency distributions and the dependence. We pay specific\ud attention to the elicitation of a sensible (improper) prior and provide a simple sufficient condition for posterior propriety. Inference is conducted through a Markov chain\ud Monte Carlo sampler. We use Bayes factors to compare various copula specifications\ud in the empirical context of Dutch dairy farm data, with two outputs.
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