Integrating spatial dependence into stochastic frontier analysis

An approach to incorporate spatial dependence into Stochastic Frontier analysis is developed and applied to a sample of 215 dairy farms in England and Wales. A number of alternative specifications for the spatial weight matrix are used to analyse the effect of these on the estimation of spatial d… ependence. Estimation is conducted using a Bayesian approach and results indicate that spatial dependence is present when explaining technical inefficiency.