Stochastic Frontier meets Breakdown Frontier

Abstract

This paper studies sensitivity analysis in stochastic frontier models by developing relaxations of the baseline assumptions imposed on the latent inefficiency and noise components, and characterize bounds for a benchmark technical-efficiency object under such relaxations. We then derive the associated breakdown frontier for conclusions about conditional technical efficiency and illustrate the procedure using a well-known dataset. We show the estimation and inference of the breakdown frontier. We also extend the analysis for widely used alternative specifications of the stochastic frontier error structure, that is, the Normal-Truncated Normal, Normal-Exponential, and Normal-Half Normal cases. Finally, we suggest avenues for extending this analysis under heteroskedasticity, the relaxation of input exogeneity, and applications using panel data. Code for empirical implementation is also provided.