FRONTIER Procedure

Stochastic frontier production models were first developed by Aigner, Lovell, and Schmidt (1977) and Meeusen and van den Broeck (1977). Specification of these models allows for random shocks of the production or cost but also includes a term for technical or cost inefficiency. Assuming that the production function takes a log-linear Cobb-Douglas form, the stochastic frontier production model can be written as

where . The term represents the stochastic error component, and is the nonnegative, technical inefficiency error component. The error component is assumed to be distributed iid normal and independently from . Given that , the error term, , is negatively skewed and represents technical inefficiency.

For the stochastic frontier cost model, . The term represents the stochastic error component, and is the nonnegative, cost inefficiency error component. Given that , the error term, , is positively skewed and represents cost inefficiency. PROC FRONTIER models the error component as a half-normal, exponential, or truncated-normal distribution.