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The Effect of Unobserved Heterogeneity in Stochastic Frontier Estimation: Comparison of Cross Section and Panel with Simulated Data for the Postal Sector

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Listed:
  • Cazals Catherine

    (Toulouse School of Economics)

  • Dudley Paul

    (Royal Mail Group)

  • Florens Jean-Pierre

    (Toulouse School of Economics)

  • Jones Michael

    (Royal Mail Group)

Abstract

In this paper, we examine the application of SFA method with time-invariant inefficiency and assess its estimation of inefficiency when applied to cross section and panel data. By using simulation methods, we look at the effect of unobserved heterogeneity on the estimates of inefficiency in both cross section and panel. In the presence of unobserved heterogeneity and significant variance in the inefficiency term, stochastic frontier estimation of inefficiency can be significantly different in panel and in cross section. This finding accords with analysis of actual data from the postal sector. We then suggest an estimation method for cost frontier when inefficiency is time-invariant and with unobserved heterogeneity.

Suggested Citation

  • Cazals Catherine & Dudley Paul & Florens Jean-Pierre & Jones Michael, 2011. "The Effect of Unobserved Heterogeneity in Stochastic Frontier Estimation: Comparison of Cross Section and Panel with Simulated Data for the Postal Sector," Review of Network Economics, De Gruyter, vol. 10(3), pages 1-22, September.
    • Handle: RePEc:bpj:rneart:v:10:y:2011:i:3:n:9
    DOI: 10.2202/1446-9022.1231
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    8. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
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    Cited by:

    1. Catherine Cazals & Paul Dudley & Jean-Pierre Florens & Michael Jones, 2012. "A Panel Data Analysis of Inefficiency and Heterogeneity in the Postal Sector," Chapters, in: Michael A. Crew & Paul R. Kleindorfer (ed.), Multi-Modal Competition and the Future of Mail, chapter 8, Edward Elgar Publishing.

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