Sensitivity analysis of efficiency rankings to distributional assumptions: applications to Japanese water utilities

Yane, Shinji and Berg, Sanford (2011): Sensitivity analysis of efficiency rankings to distributional assumptions: applications to Japanese water utilities.

Abstract

This paper examines the robustness of efficiency score rankings across four distributional assumptions for trans-log stochastic production-frontier models, using data from 1,221 Japanese water utilities (for 2004 and 2005). One-sided error terms considered include the half-normal, truncated normal, exponential, and gamma distributions. Results are compared for homoscedastic and doubly heteroscedastic models, where we also introduce a doubly heteroscedastic variable mean model, and examine the sensitivity of the nested models to a stronger heteroscedasticity correction for the one-sided error component. The results support three conclusions regarding the sensitivity of efficiency rankings to distributional assumptions. When four standard distributional assumptions are applied to a homoscedastic stochastic frontier model, the efficiency rankings are quite consistent. When those assumptions are applied to a doubly heteroscedastic stochastic frontier model, the efficiency rankings are consistent when proper and sufficient arguments for the variance functions are included in the model. When a more general model, like a variable mean model is estimated, efficiency rankings are quite sensitive to heteroscedasticity correction schemes.

• Item Type: MPRA Paper
• Language: English
• Keywords: stochastic production frontier models; Japanese water utilities; heteroscedasticity
• Subjects: L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L95 - Gas Utilities ; Pipelines ; Water Utilities; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C20 - General

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