Probabilistic frontier regression models for binary type output data

Abstract

This paper proposes a probabilistic frontier regression model for binary type output data in a production process setup. We consider one of the two categories of outputs as ‘selected’ category and the reduction in probability of falling in this category is attributed to the reduction in technical efficiency (TE) of the decision-making unit. An efficiency measure is proposed to determine the deviations of individual units from the probabilistic frontier. Simulation results show that the average estimated TE component is close to its true value. An application of the proposed method to the data related to the Indian public sector banking system is provided where the output variable is the indicator of level of non-performing assets. Individual TE is obtained for each of the banks under consideration. Among the public sector banks, Andhra bank is found to be the most efficient, whereas the United Bank of India is the least.

Keywords:

• Binary type output data
• probabilistic frontier regression models
• technical efficiency

Acknowledgements

The authors are thankful to the referees for their comments and suggestions. The authors would also like to thank Dr Akanksha Kashikar for her invaluable guidance and comments on computations.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

The second author, T. V. Ramanathan's research was partially supported by Science & Engineering Research Board (SERB), Government of India grant [SR/S4/MS: 866/13].