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A Stochastic Frontier Model with short-run and long-run inefficiency random effects

  • Roberto Colombi

    ()

  • Gianmaria Martini

    ()

  • Giorgio Vittadini

    ()

This paper presents a new stochastic frontier model for panel data. The model takes into account firm unobservable heterogeneity and short-run and long-run sources of inefficiency. Each of these features is modeled by a specific random effect. In this way, firms’ latent heterogeneity is not wrongly modeled as inefficiency, and it is possible to disentangle a time-persistent component from the total inefficiency. Under reasonable assumptions, we show that the closed-skew normal distribution allows us to derive both the log-likelihood function of the model and the posterior expected values of the random effects. The new model is compared with nested models by analyzing the efficiency of firms belonging to different sectors.

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File URL: http://hdl.handle.net/10446/842
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Paper provided by Department of Economics and Technology Management, University of Bergamo in its series Working Papers with number 1101.

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Date of creation: 2011
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Handle: RePEc:brh:wpaper:1101
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  1. Paolo Malighetti & Gianmaria Martini & Stefano Paleari & Renato Redondi, 2007. "An Empirical Investigation on the Efficiency, Capacity and Ownership of Italian Airports," Working Papers 0703, Department of Economics and Technology Management, University of Bergamo.
  2. Berta, P & Callea, G & Martini, G & Vittadini, G, 2009. "The effects of upcoding, cream skimming and readmissions on the Italian hospitals efficiency: a population–based investigation," MPRA Paper 17671, University Library of Munich, Germany.
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