Consequences of ignoring dependent error components and heterogeneity in a Stochastic Frontier Model: an application to rice producers in Northern Thailand

Li, K. ORCID: https://orcid.org/0000-0003-1353-8021, Liu, J. ORCID: https://orcid.org/0000-0002-2128-6015, Xue, Y. ORCID: https://orcid.org/0000-0001-8896-766X, Rahman, S. ORCID: https://orcid.org/0000-0002-0391-6191 and Sriboonchitta, S. (2022) Consequences of ignoring dependent error components and heterogeneity in a Stochastic Frontier Model: an application to rice producers in Northern Thailand. Agriculture, 12 (8). 1078. ISSN 2077-0472 doi: 10.3390/agriculture12081078

Abstract/Summary

The traditional Stochastic Frontier Model (SFM) suffers from a very restrictive assumption of independence of its error components and also limited ability to address heterogeneity (inefficiency effects) satisfactorily, thereby leading to potential biases in the estimation of model parameters, identification of inefficiency effect variables influencing efficiency and, ultimately, efficiency scores. This paper aims to investigate the consequences of ignoring any dependency in error components and heterogeneity in the stochastic frontier model, and proposes a copula-based SFM with heterogeneity to resolve such weaknesses based on a simulation study to prove its superiority over the traditional SFM, followed by an empirical application on a sample of rice producers from northern Thailand. We demonstrate that the proposed model, i.e., copula-based SFM with dependent error components and heterogeneity, is unbiased and robust. The simulation experiments show that the traditional SFM can cause biases in parameter estimation and severe overestimation of technical efficiency. The traditional SFM with heterogeneity also has similar consequences. However, just ignoring heterogeneity does not have a great impact on parameter estimation and technical efficiency compared to the consequence of ignoring dependency in error components. The empirical application of the proposed model results show that land, labor and material inputs are all significant drivers of rice production in our copula-based SFM with dependent error components and heterogeneity, whereas in the traditional SFM model only the land variable seems to be a significant driver of rice production. The mean technical efficiency (MTE) score was also overestimated by two points in the traditional SFM, i.e., MTE = 0.88 versus 0.86. Finally, results of the copula-based SFM with dependent error components and heterogeneity reveals that both subsistence pressure and the use of hired labor are significantly associated with technical inefficiency, whereas the traditional SFM could identify the effect of hired labor use only. Therefore, caution is necessary when interpreting results from the conventional SFM as the results may be biased, incomplete and/or inadequate.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/106419
Identification Number/DOI	10.3390/agriculture12081078
Refereed	Yes
Divisions	Life Sciences > School of Agriculture, Policy and Development > Department of Agri-Food Economics & Marketing
Publisher	MDPI
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