News

Plenary presentation of StoNED at VI North American Productivity Workshop 2010 in Houston

June 2010: One of the highlights of this year’s North American Productivity Workshop (NAPW) workshop was the plenary session titled “Two Stage Methods in Efficiency and Productivity Analysis”, chaired by Professor Subal Kumbhakar. The session started with the presentations by Peter Schmidt, Paul Wilson, William Greene, and Timo Kuosmanen on the same theme, followed by a panel discussion and questions from the audience. Timo Kuosmanen's presentation on the StoNED approach was titled " Towards One-Stage Non-/Semiparametric Estimation and a Unified Framework”. In his presentation, Kuosmanen outlined the development of the StoNED method from the least-squares formulation of DEA, and introduced the Z-variables that represent the operating environment, operational conditions, managerial practices or factors influencing the firm performance. Kuosmanen coined the new term “StoNEZD” (=Stochastic Non-smooth Envelopment of Z-variables Data) for this approach.

After the plenary session, Professor Robin Sickles, the Editor-in-Chief of the Journal of Productivity Analysis announced there will be a symposium issue of the journal consisting of the papers by the four panelists together with commentary to the papers.

In addition to the plenary presentation, there were at least four other StoNED papers in the contributed sessions of NAPW 2010, presented by Andrew Johnson, Maethee Mekaroonreung, Antti Saastamoinen , and Timo Kuosmanen.

NAPW 2010 took place at the Rice University, 2-5 June 2010. The local organizing committee was lead by Professor Robin Sickles. In 2011 there will be the European EWEPA workshop in Verona, Italy. The next NAPW will be organized in 2012 at Rice University in Houston.

StoNED applied to the regulation of electricity distribution firms in Finland

May 2010: The Finnish Energy Market Authority (Energiamarkkinavirasto EMV) has commissioned the Helsinki-based consulting firm Sigma-Hat Economics Oy to investigate the possible application of the StoNED method to the government regulation of the electricity distribution companies in Finland. There are 89 electricity distribution firms in Finland, each of which with a local monopoly for the distribution in their designated network area. The Finnish regulator EMV has years of experience in applying frontier estimation techniques such as DEA and SFA to estimate the acceptable total cost for each distribution firm. The purpose of the commissioned study is to examine how the StoNED method could be applied to the regulatory model of EMV to combine the appealing features of DEA and SFA in a more coherent and systematic fashion. The objectives of the study also include the investigation of the possible use of panel data and how the heterogeneity of firms and their operating environments could be modeled. In particular, firms operating in the larger cities and towns have criticized the current regulatory model of EMV for favoring firms that operate in rural or sub-urban environments.

Regulation of the energy distribution firms is one of the few areas where tools and techniques of productive efficiency analysis have been applied to the real-world decisions with major economic impacts. For example, the Finnish electricity distribution firms had the total turnover of 1.68 Billion Euro in 2008. One percent error in the efficiency estimate can cost Millions of Euro. Regulators in many countries are currently using DEA, SFA or similar techniques. By considering the new StoNED method, the Finnish EMV shows leadership towards developing the most advanced regulatory model in the world.

The project group of Sigma-Hat Economics Oy is lead by Heikki Pursiainen and Professors Klaus Kultti and Timo Kuosmanen. The final report of the project is due by the end of August 2010. In addition to the written report, the expected outputs of the project include an Excel application that EMV and the firms can use for computing the StoNED efficiency estimates. Further information about the project will be added to the this website in due course.

The name of StoNED changes, the catchy acronym remains

March 2010: Timo Kuosmanen and Mika Kortelainen have changed the name of the StoNED method to address the critique from the Editor Paul Wilson and an anonymous Associate Editor of the Journal of Productivity Analysis. Editor Paul Wilson writes “your estimation idea is not fully non-parametric, since specific distributional assumptions are required. Consequently, the method is semi-parametric. This is fine, but call it what it is.” As a response to this comment, Kuosmanen and Kortelainen coined the new name “Stochastic Non-smooth Envelopment of Data”, which preserves the original acronym StoNED. The catchy acronym StoNED has already been cited in a number of studies, including published peer-reviewed articles. According to Kuosmanen and Kortelainen, the readership of their work should be mature enough to take the acronym as it is. They emphasize that the acronym does not convey any reference to the slang term for cannabis intoxication or any other inappropriate hidden connotations (see Wikipedia for the disambiguation of the term stoned). The second revision of Kuosmanen&Kortelainen’s paper was submitted to the Journal of Productivity Analysis in 30 March 2010, and is currently under review.

Agricultural and Food Science publishes the first application of StoNED

December 2009: The first published application of the StoNED method in a peer-reviewed journal has appeared in the journal Agricultural and Food Science. The article titled Role of Benchmark Technology in Sustainable Value Analysis: An Application to Finnish Dairy Farms" was co-authored by Timo Kuosmanen and Natalia Kuosmanen. The authors review alternative frontier estimation approaches available for assessing sustainability performance of farms, including the StoNED method. The methods are then applied to the sample of Finnish dairy farms. The authors find that “the stochastic frontier methods SFA and StoNED, which filter out the noise component from the inefficiency term and attribute only a part of the deviations from the frontier to the (sustainable value) estimate, are likely to provide more realistic estimates of the sustainable improvement potential, which translates into more realistic performance targets at the farm level.”

New appointments for Kuosmanen and Kortelainen

July 2009: Timo Kuosmanen has been appointed as Professor of Quantitative Methods at Helsinki School of Economics. He starts in the new position in August 2009. Mika Kortelainen has been appointed to a lectureship at the University of Manchester, the School of Social Sciences. For more detailed news, click HERE.

Journal of Productivity Analysis invites revised version of the StoNED paper

June 2009: Timo Kuosmanen and Mika Kortelainen have revised the StoNED paper to address the comments from an anonymous Associate Editor and two reviewers of the Journal of Productivity Analysis. Novel features of the revised manuscript include a log-transformed multiplicative variant of the StoNED model, an extension to panel data, and a new set of Monte Carlo simulations. As result of these revisions, the title of the paper has been changed to "Stochastic Nonparametric Envelopment of Data: Frontier Estimation Subject to Shape Constraints (the revised version can be downloaded by clicking the title). The revised manuscript was submitted to review in June 2009.

Operations Research publishes the foundational article of Kuosmanen and Johnson

March 2009: The article titled "Data Envelopment Analysis as Nonparametric Least Squares Regression", co-authored by Timo Kuosmanen and Andrew Johnson, has been accepted for publication in the Operations Research. Kuosmanen and Johnson's article proves that DEA can be formulated as convex nonparametric least squares (CNLS) regression subject to shape constraints on frontier and sign constraints on residuals. This reinterpretation reveals the classic parametric programming model by Aigner and Chu (1968) as a constrained special case of DEA. Applying these insights, Kuosmanen and Johnson develop a nonparametric variant of the corrected ordinary least squares (COLS) method, named as Corrected Concave Nonparametric Least Squares (C2NLS). The new C2NLS estimator is shown to be consistent and asymptotically unbiased.

The least squares formulation of DEA establised in Kuosmanen and Johnson's article forms the foundation of the StoNED method. Specifically, by relaxing the sign-constraint on residuals, the DEA model transforms to the CNLS regression, which is used for estimating the shape of the frontier in the StoNED method.

Operations Research is the flagship journal of the Institute of Operations Research and Management Sciences (INFORMS), and one of the most prestigious journals in its field.

The Scandinavian Journal of Economics publishes article applying CNLS to testing inefficiency hypothesis

11 July 2008: The article titled ”Neoclassical versus Frontier Production Models? Testing for the Presence of Inefficiencies in the Regression Residuals”, co-authored by Timo Kuosmanen and Mogens Fosgerau, has been accepted for publication in the The Scandinavian Journal of Economics. This article develops nonparametric tests that enable one to test for the presence of inefficiency in the regression residuals at the sample level. CNLS regression (step 1 of the cross-sectional StoNED method) is considered as one possible estimation technique in the paper. Thus, the tests developed in this article can be readily used as specification tests for the StoNED model.

The Scandinavian Journal of Economics is one of the oldest and most distinguished economics journals in the world.

The Econometrics Journal publishes article on CNLS

2 July 2008: Timo Kuosmanen’s article ”Representation Theorem for Convex Nonparametric Least Squares” has been published in the 2nd (July 2008) issue of volume 11 of the The Econometrics Journal. This article points out the connection between DEA and the nonparametric least squares regression subject to shape constraints, referred to as CNLS. Importantly, CNLS regression forms the first step of the two-step estimation routine of the StoNED approach. Kuosmanen’s article shows that the infinite dimensional CNLS problem can be converted to an equivalent quadratic programming (QP) problem, which is solvable by standard QP solver software.

The Econometrics Journal is a relatively new journal, established in 1998 by the Royal Economic Society with the aim of creating a top international field journal for the publication of econometric research. The Royal Economic Society is one of the oldest and most prestigious economic associations in the world.

1 July 2007: StoNED has won three prizes at the 10th European Workshop on Efficiency and Productivity Analysis (EWEPA X), organized at the IESEG School of Management in Lille, France, June 27-30, 2007. Timo Kuosmanen and Mika Kortelainen were awarded the prize for the most original paper of the conference for their study "Stochastic Nonparametric Envelopment of Data: Cross-sectional frontier estimation subject to shape constraints". The jury (p. Agrell, K. Kerstens, and P. Vanden Eeckaut) selected the prize winning paper from more than 200 papers accepted for a presentation in the conference. The prize - Limdep 9 software - was sponsored by the Econometric Software Inc. The paper by Kuosmanen and Kortelainen was also awarded the 1st prize of the poster presentation in Session III, based on anonymous votes by conference participants. The prize-winning poster can be viewed in the pdf format HERE. The poster prize - the fortcoming book by Fried, Lovell, and Schmidt - was sponsored by the Oxford University Press. In addition, Mika Kortelainen was awarded with the 3rd prize of the Young Researcher (YR) session II for his presentation titled "Semiparametric Estimation of Stochastic Frontiers under Regularity Conditions: A Single-Index Approach". The prizes of YR sessions were awarded based on votes by the conference participants. The YR prize - Frontier Analyst software - was sponsored by Banxia Software. Many thanks for the sponsors for the valuable prizes, and especially to all of the conference participants who voted our papers!

StoNED homepage opens

4 June 2007: Stochastic nonparametric envelopment of data (StoNED) is a new frontier estimation framework that combines the virtues of nonparametric DEA frontier with the stochastic noise term of SFA. The purpose of the StoNED homepage is to provide the latest news and developments about the StoNED approach. From this homepage, you can download working papers, preprints, posters, presentations, and computation codes related to the StoNED methodology free of charge. Save the StoNED homepage in your favorites and stay tuned for the latest developments!