Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2015/24: On the Distributional Assumptions in the StoNED model

Xiaomei Cheng (), Jonas Andersson () and Endre Bjørndal ()
Additional contact information
Xiaomei Cheng: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Jonas Andersson: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Endre Bjørndal: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: In a recent paper Johnson and Kuosmanen (2011) propose a new, semi-parametric, general cost-frontier model, the stochastic nonparametric envelopment of data (StoNED). The model is semi-parametric in the sense that the cost function is estimated nonparametrically, while the functional form of the distribution for the error term is parametrically specified. A common assumption for this distribution is that it is a convolution of a truncated normal distribution, representing inefficiency, and a normal distribution, representing noise. This parametric form has the drawback that a negative skewness implies a negative expected inefficiency. It can thus never capture a negatively skewed distribution with a positive expectation. In this paper we investigate this assumption and its consequences for an analysis of inefficiency. Furthermore, we propose a solution to the problem and investigate its performance by means of a Monte Carlo simulation.

Keywords: StoNED model; Composite error; Wrong skewness; Misspecification

JEL-codes: C00; C10; C14; C15; Q00

12 pages, September 17, 2015

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