Thai Export Efficiency in AFTA: Copula-Based Gravity Stochastic Frontier Model with Autocorrelated Inefficiency

Abstract

© 2018, Springer International Publishing AG, part of Springer Nature. This paper studies the effects of the ASEAN Trade Area (AFTA) on Thai export efficiency using copula-based gravity stochastic frontier gravity model with autocorrelated inefficiency. One of the main assumptions of standard stochastic frontier model is that one-sided technical inefficiency error u and a symmetric error v are independent, instead researches have proposed to relax this assumption using copula to joint distribution of (u, v). Nevertheless, most of previous studies treat technical efficiency as time invariant which is a strong assumption. Therefore, we will include the lag effect of inefficiency to allow inefficiency in one period to be influenced by its previous level. In this paper, we consider the multivariate normal copula and t copula based in term of technical efficiency, and then select the best model based on AIC and BIC criteria. This is the first application of the copula-based model of error terms and temporal dependence of inefficiency with gravity trade model. It is found that Thai export efficiency are in range from 0.58 and 0.67 implying that the Thailand is not taking full benefits of AFTA.