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Efficiency estimation with heteroscedasticity in a panel data model


  • Subal Kumbhakar


This paper deals with the estimation of efficiency in a panel data framework. A oneway error component model (ECM) is generalized to accommodate firm-specific variances for the inefficiency component. A multi-step procedure is developed to estimate the cost function and predict increase in cost due to inefficiency. The model is applied to examine efficiency of ten major investor owned electric utilities in Texas during 1966-1985. The production technology is represented by a translog cost function that is assumed to be the same for every utility (except for heterogeneous intercepts), but it is allowed to shift over time due to technical change. The data supports the ECM with firm-specific variances and rejects the homoscedastic ECM. Cost inefficiency is found to vary substantially across utilities ranging from 0 to 28%. Technical change is found to be quite small (less than ± 1%), especially during 1971-1985.

Suggested Citation

  • Subal Kumbhakar, 1997. "Efficiency estimation with heteroscedasticity in a panel data model," Applied Economics, Taylor & Francis Journals, vol. 29(3), pages 379-386.
  • Handle: RePEc:taf:applec:v:29:y:1997:i:3:p:379-386
    DOI: 10.1080/000368497327164

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    References listed on IDEAS

    1. Amjad, Rashid, 1984. "The management of Pakistan's economy 1947-82," MPRA Paper 35850, University Library of Munich, Germany.
    2. Amjad, Rashid, 1987. "Human resource development: the Asian experience in employment and manpower planning - an overview," MPRA Paper 38135, University Library of Munich, Germany.
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    Cited by:

    1. Mark Andor & Frederik Hesse, 2014. "The StoNED age: the departure into a new era of efficiency analysis? A monte carlo comparison of StoNED and the “oldies” (SFA and DEA)," Journal of Productivity Analysis, Springer, vol. 41(1), pages 85-109, February.
    2. Maria Nieswand & Matthias Walter, 2010. "Cost Efficiency and Subsidization in German Local Public Bus Transit," Discussion Papers of DIW Berlin 1071, DIW Berlin, German Institute for Economic Research.
    3. Shantanu Dutta & Om Narasimhan & Surendra Rajiv, 1999. "Success in High-Technology Markets: Is Marketing Capability Critical?," Marketing Science, INFORMS, pages 547-568.
    4. Almas Heshmati & Ilham Haouas, 2011. "Employment Efficiency and Production Risk in the Tunisian Manufacturing Industries," Working Papers 602, Economic Research Forum, revised 07 Jan 2011.
    5. Heshmati, Almas & Ncube, Mkhululi, 1998. "An Econometric Model of Employment in Zimbabwe's Manufacturing Industries," SSE/EFI Working Paper Series in Economics and Finance 277, Stockholm School of Economics, revised 15 Aug 2003.
    6. Arcos, Angel & de Toledo, Pablo Alvarez, 2009. "An analysis of the Spanish electrical utility industry: Economies of scale, technological progress and efficiency," Energy Economics, Elsevier, vol. 31(3), pages 473-481, May.
    7. Khayyat, Nabaz T. & Heshmati, Almas, 2014. "Production Risk, Energy Use Efficiency and Productivity of Korean Industries," Working Paper Series in Economics and Institutions of Innovation 359, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    8. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2005. "Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2127-2141.
    9. Chung-Chu Chuang & Yu-Chieh Tang, 2015. "Asymmetric Dependence between Efficiency and Market Power in the Taiwanese Life Insurance Industry," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(4), pages 511-525, September.

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