One-step and two-step estimation of the effects of exogenous variables on technical efficiency levels
Consider a stochastic frontier model with one-sided inefficiency u, and suppose that the scale of u depends on some variables (firm characteristics) z. A one-step model specifies both the stochastic frontier and the way in which u depends on z, and can be estimated in a single step, for example by maximum likelihood. This is in contrast to a two-step procedure, where the first step is to estimate a standard stochastic frontier model, and the second step is to estimate the relationship between (estimated) u and z. In this paper we propose a class of one-step models based on the scaling property that u equals a function of z times a one-sided error u * whose distribution does not depend on z. We explain theoretically why two-step procedures are biased, and we present Monte Carlo evidence showing that the bias can be very severe. This evidence argues strongly for one-step models whenever one is interested in the effects of firm characteristics on efficiency levels.
|Date of creation:||Oct 2001|
|Date of revision:||Mar 2002|
|Publication status:||Published in Journal of Productivity Analysis 18.2(2002): pp. 129-144|
|Contact details of provider:|| Postal: |
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