A STOCHASTIC FRONTIER PRODUCTION FUNCTION WITH FLEXIBLE RISK PROPERTIES

This paper considers a stochastic frontier production function which h as additive, heteroscedastic error structure. The model allows for neg ative or positive marginal production risks of inputs, as originally p roposed by Just and Pope (1978). The technical efficiencies of individ ual firms in the sample are a function of the levels of the input vari ables in the stochastic frontier, in addition to the technical ineffic iency effects. These are two features of the model which are not exhib ited by the commonly used stochastic frontiers with multiplicative err or structures, An empirical application is presented using cross-secti onal data on Ethiopian peasant farmers. The null hypothesis of no tech nical inefficiencies of production among these farmers is accepted. Fu rther, the flexible risk models do not fit the data on peasant farmers as well as the traditional stochastic frontier model with multiplicat ive error structure.