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Fixed and Random Effects in Stochastic Frontier Models

  • Willam Greene

    ()

Received stochastic frontier analyses with panel data have relied on traditional fixed and random effects models. We propose extensions that circumvent two shortcomings of these approaches. The conventional panel data estimators assume that technical or cost inefficiency is time invariant. Second, the fixed and random effects estimators force any time invariant cross unit heterogeneity into the same term that is being used to capture the inefficiency. Inefficiency measures in these models may be picking up heterogeneity in addition to or even instead of inefficiency. A fixed effects model is extended to the stochastic frontier model using results that specifically employ the nonlinear specification. The random effects model is reformulated as a special case of the random parameters model. The techniques are illustrated in applications to the U.S. banking industry and a cross country comparison of the efficiency of health care delivery. Copyright Springer Science+Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11123-004-8545-1
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Article provided by Springer in its journal Journal of Productivity Analysis.

Volume (Year): 23 (2005)
Issue (Month): 1 (01)
Pages: 7-32

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Handle: RePEc:kap:jproda:v:23:y:2005:i:1:p:7-32
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100296

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  1. William Greene, 2002. "The Behavior of the Fixed Effects Estimator in Nonlinear Models," Working Papers 02-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Peter Schmidt & Chirok Han & Luis Orea, 2004. "Estimation of a Panel Data Model with Parametric Temporal Variation in Individual Effects," Econometric Society 2004 Far Eastern Meetings 519, Econometric Society.
  3. Jeffrey M. Wooldridge, 2005. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 39-54.
  4. William Greene, 2001. "Fixed and Random Effects in Nonlinear Models," Working Papers 01-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Luis Orea & Subal C. Kumbhakar, 2004. "Efficiency measurement using a latent class stochastic frontier model," Empirical Economics, Springer, vol. 29(1), pages 169-183, January.
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