Stochastic Frontier Analysis

Stochastic Frontier Analysis (SFA) is a method used to measure how efficiently a business or firm operates compared to an ideal, most-efficient version. It considers that in real-world conditions, factors like luck or random events can affect performance, so it separates these from true inefficiency. By analyzing data, SFA helps identify how much of the output variation is due to inefficiency versus random noise, allowing organizations to understand their performance gaps and find ways to improve productivity while accounting for external influences.