Sustainable finance
Stochastic Frontier Analysis (SFA)
Definition
Stochastic frontier analysis is an econometric method, developed by Aigner, Lovell and Schmidt and by Meeusen and van den Broeck (1977), that estimates a production or cost frontier representing best practice and decomposes each observation's deviation from it into statistical noise and inefficiency. In sustainability research it is used to benchmark the environmental and resource efficiency of farms, firms, utilities and countries — for example, how far a farm's input use or emissions exceed the achievable best practice given its output.
References
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This reference provides supporting context for how “Stochastic Frontier Analysis (SFA)” is defined and used.
Overview
How it is used
The method structures eco-efficiency research, agricultural resource-use studies, utility regulation benchmarking and firm-level environmental performance analysis.
Why it matters
You cannot manage efficiency you cannot measure; SFA is one of the few tools that measures it while admitting that the world is noisy.