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Investigating the impact of endogeneity on inefficiency estimates in the application of stochastic frontier analysis to nursing homes

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Listed:
  • Ryan Mutter
  • William Greene
  • William Spector
  • Michael Rosko
  • Dana Mukamel

Abstract

This paper examines the impact of an endogenous cost function variable on the inefficiency estimates generated by stochastic frontier analysis (SFA). The specific variable of interest in this application is endogenous quality in nursing homes. We simulate a dataset based on the characteristics of for-profit nursing homes in California, which we use to assess the impact on SFA-generated inefficiency estimates of an endogenous regressor under a variety of scenarios, including variations in the strength and direction of the endogeneity and whether the correlation is with the random noise or the inefficiency residual component of the error term. We compare each of these cases when quality is included and excluded from the cost equation. We provide evidence of the impact of endogeneity on inefficiency estimates yielded by SFA under these various scenarios and when the endogenous regressor is included and excluded from the model. Copyright Springer Science+Business Media, LLC (outside the USA) 2013

Suggested Citation

  • Ryan Mutter & William Greene & William Spector & Michael Rosko & Dana Mukamel, 2013. "Investigating the impact of endogeneity on inefficiency estimates in the application of stochastic frontier analysis to nursing homes," Journal of Productivity Analysis, Springer, vol. 39(2), pages 101-110, April.
    • Handle: RePEc:kap:jproda:v:39:y:2013:i:2:p:101-110
    DOI: 10.1007/s11123-012-0277-z
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    References listed on IDEAS

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    4. Gertler, Paul J & Waldman, Donald M, 1992. "Quality-Adjusted Cost Functions and Policy Evaluation in the Nursing Home Industry," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1232-1256, December.
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    More about this item

    Keywords

    Stochastic frontier analysis; Endogeneity; Efficiency; Quality; Nursing homes; C13; C15; I12;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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