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METHODOLOGY AND APPLICATIONS OF. STOCHASTIC FRONTIER ANALYSIS. Andrea Furkov . STRUCTURE OF THE PRESENTATION. Part 1. Theory: Illustration the basics of Stochastic Frontier Analysis (SFA). Concept of efficiency Estimation Identification of sources of inefficiency Part 2. An APPLICATIONS of SFA. Theory usually presents the producers as successful optimizers. They maximize production , minimize cost, and maximize profits. Conventional econometric techniques build on this base to estimate production /cost/profit function parameters using regression techniques where deviations of observed choices from optimal ones are modeled as statistical noise. Econometric estimation techniques should allow for the fact that deviations of observed choices from optimal ones are due to two factors: failure to optimize , inefficiency due to random shocks.
• Frontier cost function: identifies the minimum costs at a given output level, input prices and existing production technology • Stochastic frontier cost function model (single Cobb-
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