Medhi Farsi (Department of Management, Technology and Economics, ETH Zurich, Switzerland) Massimo Filippini (Istituto microeconomia e economia pubblica (MecoP), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera) Diego Lunati () (Istituto microeconomia e economia pubblica (MecoP), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera)
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This paper examines the cost efficiency in the nursing home industry, an issue of concern to Swiss policy makers because of the explosive growth of national expenditure on elderly care and the aging of the population. A stochastic cost frontier model with a translog function has been applied to a balanced panel data of 1780 observations from 356 nursing homes operating over five years (1998-2002) in Switzerland. We compare the estimation results from different panel data econometric techniques focusing on the various methods of specification of unobserved heterogeneity across firms. In particular, the potential effects of such unobserved factors on the estimation results and their interpretation have been discussed. The paper eventually addresses three empirical issues: (1) the measurement of economies of scale in the nursing home sector, (2) the assessment of the economic performance of the firms by estimating their cost efficiency scores, and (3) the role of unobserved heterogeneity in the estimation process. The findings suggest that the economies of scale are an important potential source of cost reduction in a majority of Swiss nursing homes. Taking the size as given the efficiency performance of most individual units is practically very close to the estimated best practice. Nevertheless, the efficiency estimates suggest that some of the nursing homes can significantly reduce their costs by improving their operations.
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Find related papers by JEL classification: C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General
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