Facoltà di scienze economiche

Unobserved heterogeneity in stochastic cost frontier models : a comparative analysis

Farsi, Mehdi ; Filippini, Massimo ; Kuenzle, Michael

This paper studies a number of stochastic cost frontier models comparing their ability to distinguish unobserved heterogeneity from inefficiency variation among firms. The main focus is on the panel data models that incorporate firm-specific effects in a stochastic frontier framework, as proposed by Greene (2002, 2004). In cases where the unobserved heterogeneity is correlated with some of the... Plus

Ajouter à la liste personnelle
    Summary
    This paper studies a number of stochastic cost frontier models comparing their ability to distinguish unobserved heterogeneity from inefficiency variation among firms. The main focus is on the panel data models that incorporate firm-specific effects in a stochastic frontier framework, as proposed by Greene (2002, 2004). In cases where the unobserved heterogeneity is correlated with some of the explanatory variables, while the random effects estimators can be biased the fixed effects model may overestimate inefficiency scores. In line with Mundlak (1978), a simple method is proposed to include such correlations in random effects specification. The models are applied to a panel of 36 Swiss nursing homes operating from 1993 to 2001. The estimation results are compared and the resulted improvements are discussed. The results suggest that the proposed specification can avoid the inconsistency problem while keeping the inefficiency estimates unaffected.