The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Stochastic Frontier Models

  • Hung-Jen Wang
Reference work entry


The stochastic frontier model was first proposed in the context of production function estimation to account for the effect of technical inefficiency. The inefficiency causes actual output to fall below the potential level (that is, the production frontier) and also raises production cost above the minimum level (that is, the cost frontier). Recent applications of the model are found in many fields of study including labour, finance, and economic growth. In these applications, the observed outcome (of wages, investment, and so on) is modelled as being deviating from a frontier level in one direction owing to factors such as information asymmetry.


Aftermarkets Allocative inefficiency Convergence Copulas Cost functions Duality Financing constraints Fixed-effect panel estimators Labour market search models Likelihood functions Nonparametric estimation Production function estimation Production functions Semiparametric estimation Stochastic cost frontiers Stochastic frontier models Technical inefficiency Technological catch-up Truncated distributions 

JEL Classifications

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Hung-Jen Wang
    • 1
  1. 1.