1. School of Business, Economics and Law University of Gothenburg
Comments on: Observed and unobserved heterogeneity in stochastic frontier models by Maria Kopsakangas-Savolainen and Rauli Svento
Lennart Hjalmarsson
School of Business, Economics and Law
University of Gothenburg

2. The paper Interesting model comparison Useful excercise
Enhance our understanding of frontier model properties

3. Issue addressed? Stochastic frontier model comparison paper or
Electricity distribution paper
You have to choose!

4. Frontier modelling – benchmark regulation
We want to nail down the best-practice frontier as a benchmark for efficiency measurement
Efficiency = distance to a frontier – not high TFP (except for scale efficiency)
There are many such distances

6. SFA v+u What is pure random and what is inefficiency? Major problem:
Ad hoc assumptions: no data generating model (except the vintage model)

8. .

9. SFA
SFA started 1977 with 3 papers with the same idea: Composed error model: v + u
v normal
u skewed (half normal, exponential..)

10. SFA problem v+u What is pure random and what is inefficiency?
Major problem:
Ad hoc assumptions: no data generating model (except the vintage model)
Cross-sections: CE close to OLS

11. SFA
Panel data more useful
But still: What is ”true” inefficiency and what are heterogeneity and fixed effects?

12. SFA problem, cont. Results often very sensitive to model specification
In this paper extreme sensitivity and even negative correlation between efficiency rankings

13. As an SFA paper
More presentation, interpretation and explanation of the results
What type of units get totally different rankings….
Policy conclusions?

14. Electricity distribution paper
What are you analysing: network companies or network + retail?
Is this a proper model for a network company? Choice of inputs and outputs?
A priori: fixed effect important!
Price of input power but no losses?
Scale-elasticity? MES?

15. As an electricity paper
Much more presentation, interpretation and explanation of the results
What type of units get totally different ranking….
Regulation conclusions?
More work to do!

16. General benchmarking question
Is a stochastic specification suitable when data is correct?
Competing approach: deterministic nonparametric DEA with bootstrapping

17. CRS and VRS DEA
DEA frontier, CRS vs VRS