The Spatial Efficiency Multiplier and Random Effects in Spatial Stochastic Frontier Models

Abstract:

We extend the emerging literature on spatial frontier models in three respects. Firstly, we account for latent heterogeneity by developing a maximum likelihood random effects spatial autoregressive (SAR) stochastic frontier model. Secondly, to analyze the finite sample properties of a spatial stochastic frontier model we develop a Monte Carlo experimental methodology which we then apply. Thirdly, we introduce the concept of the spatial efficiency multiplier and show that the efficiency benchmark for a productive unit from the structural form of a spatial stochastic frontier model differs from the efficiency benchmark from the reduced form of the model.