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How much confidence should we place in efficiency estimates?

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Author Info
Andrew Street (Centre for Health Economics, University of York, UK)
Abstract

Ordinary least squares (OLS) and stochastic frontier (SF) analyses are commonly used to estimate industry-level and firm-specific efficiency. Using cross-sectional data for English public hospitals, a total cost function based on a specification developed by the English Department of Health is estimated. Confidence intervals are calculated around the OLS residuals and around the inefficiency component of the SF residuals. Sensitivity analysis is conducted to assess whether conclusions about relative performance are robust to choices of error distribution, functional form and model specification. It is concluded that estimates of relative hospital efficiency are sensitive to estimation decisions and that little confidence can be placed in the point estimates for individual hospitals. The use of these techniques to set annual performance targets should be avoided. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.773
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 12 (2003)
Issue (Month): 11 ()
Pages: 895-907
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:wly:hlthec:v:12:y:2003:i:11:p:895-907

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Waldman, Donald M., 1982. "A stationary point for the stochastic frontier likelihood," Journal of Econometrics, Elsevier, vol. 18(2), pages 275-279, February. [Downloadable!] (restricted)
  2. Neil Soderlund & Rowena van der Merwe, 1999. "Hospital benchmarking analysis and the derivation of cost indices," Working Papers 174chedp, Centre for Health Economics, University of York. [Downloadable!]
  3. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August. [Downloadable!] (restricted)
  4. Caudill, Steven B & Ford, Jon M & Gropper, Daniel M, 1995. "Frontier Estimation and Firm-Specific Inefficiency Measures in the Presence of Heteroscedasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 105-11, January.
  5. William C. Horrace & Peter Schmidt, 2002. "Confidence Statements for Efficiency Estimates from Stochastic Frontier Models," Econometrics 0206006, EconWPA. [Downloadable!]
  6. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July. [Downloadable!] (restricted)
  7. Vitaliano, Donald F., 1987. "On the estimation of hospital cost functions," Journal of Health Economics, Elsevier, vol. 6(4), pages 305-318, December. [Downloadable!] (restricted)
  8. Giuffrida, Antonio & Gravelle, Hugh & Sutton, Matthew, 2000. "Efficiency and administrative costs in primary care," Journal of Health Economics, Elsevier, vol. 19(6), pages 983-1006, November. [Downloadable!] (restricted)
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  9. Schmidt, Peter & Lin, Tsai-Fen, 1984. "Simple tests of alternative specifications in stochastic frontier models," Journal of Econometrics, Elsevier, vol. 24(3), pages 349-361, March. [Downloadable!] (restricted)
  10. Hough, J R, 1985. "A Note on Economies of Scale in Schools," Applied Economics, Taylor and Francis Journals, vol. 17(1), pages 143-44, February.
  11. Peter Schmidt, 1985. "Frontier production functions," Econometric Reviews, Taylor and Francis Journals, vol. 4(2), pages 289-328. [Downloadable!] (restricted)
  12. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July. [Downloadable!] (restricted)
  13. Wagstaff, Adam, 1989. "Estimating Efficiency in the Hospital Sector: A Comparison of Three Statistical Cost Frontier Models," Applied Economics, Taylor and Francis Journals, vol. 21(5), pages 659-72, May.
  14. Hadri, Kaddour, 1999. "Estimation of a Doubly Heteroscedastic Stochastic Frontier Cost Function," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(3), pages 359-63, July.
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  16. Dopuch, Nicholas & Gupta, Mahendra, 1997. "Estimation of benchmark performance standards: An application to public school expenditures," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 141-161, July. [Downloadable!] (restricted)
  17. Uwe Jensen, 2000. "Is it efficient to analyse efficiency rankings?," Empirical Economics, Springer, vol. 25(2), pages 189-208. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2004. "Cost Efficiency in Regional Bus Companies: An Application of Alternative Stochastic Frontier Models," CEPE Working paper series 04-33, CEPE Center for Energy Policy and Economics, ETH Zürich. [Downloadable!]
  2. Helen Simpson, 2007. "Productivity in Public Services," The Centre for Market and Public Organisation 07/164, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  3. Niccie L. McKay & Mary E. Deily, 2008. "Cost inefficiency and hospital health outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 17(7), pages 833-848. [Downloadable!]
  4. Mehdi Farsi & Massimo Filippini & William Greene, 2005. "Application of Panel Data Models in Benchmarking Analysis of the Electrivity Distribution Sector," CEPE Working paper series 05-39, CEPE Center for Energy Policy and Economics, ETH Zürich. [Downloadable!]
  5. Mehdi Farsi, 2008. "The temporal variation of cost-efficiency in Switzerland’s hospitals: an application of mixed models," Journal of Productivity Analysis, Springer, vol. 30(2), pages 155-168, October. [Downloadable!] (restricted)
  6. Mehdi Farsi & Massimo Filippini, 2008. "Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 335-350. [Downloadable!]
    Other versions:
  7. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2005. "Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes," Applied Economics, Taylor and Francis Journals, vol. 37(18), pages 2127-2141, October. [Downloadable!] (restricted)
  8. Mehdi Farsi & Aurelio Fetz & Massimo Filippini, 2007. "Benchmarking and Regulation in the Electricity Distribution Sector," CEPE Working paper series 07-54, CEPE Center for Energy Policy and Economics, ETH Zürich. [Downloadable!]
  9. C. L. Chua & Alfons Palangkaraya & Jongsay Yong, 2009. "Hospital Competition, Technical Efficiency, and Quality," Melbourne Institute Working Paper Series wp2009n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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