Sustainable finance
Stochastic Frontier Analysis (SFA)
An econometric technique that measures efficiency by estimating a best-practice frontier and each unit's distance from it.
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.
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