Journal
JOURNAL OF ECONOMETRICS
Volume 157, Issue 2, Pages 286-296Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2009.12.006
Keywords
Stochastic frontier models; Fixed effects; Panel data
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Funding
- National Science Council [NSC-93-2415-H-001-020]
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Traditional panel stochastic frontier models do not distinguish between unobserved individual heterogeneity and inefficiency. They thus force all time-invariant individual heterogeneity into the estimated inefficiency. Greene (2005) proposes a true fixed-effect stochastic frontier model which, in theory, may be biased by the incidental parameters problem. The problem usually cannot be dealt with by model transformations owing to the nonlinearity of the stochastic frontier model. In this paper, we propose a class of panel stochastic frontier models which create an exception. We show that first-difference and within-transformation can be analytically performed on this model to remove the fixed individual effects, and thus the estimator is immune to the incidental parameters problem. Consistency of the estimator is obtained by either N -> infinity or T -> infinity, which is an attractive property for empirical researchers. (C) 2010 Elsevier B.V. All rights reserved.
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