Imposing regional monotonicity on translog stochastic production frontiers with a simple three-step procedure

Abstract

We show that the monotonicity condition is conceptually important in Stochastic Frontier Analysis (SFA). Despite its importance, most empirical studies do not impose monotonicity—probably because existing approaches are rather complex and laborious. Therefore, we propose a three-step procedure that is much simpler than existing approaches. We demonstrate how monotonicity of a translog function can be imposed regionally at a connected set (region) of input quantities. Our method can be applied not only to impose monotonicity on translog production frontiers but also to impose other restrictions on cost, distance, or profit frontiers.