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Firm-heterogeneity, persistent and transient technical inefficiency: a generalized true random effects model

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<mark>Journal publication date</mark>01/2014
<mark>Journal</mark>Journal of Applied Econometrics
Issue number1
Volume29
Number of pages23
Pages (from-to)110-132
Publication statusPublished
Early online date25/09/12
Original languageEnglish

Abstract

This paper considers a panel data stochastic frontier model that disentangles unobserved firm effects (firm heterogeneity) from persistent (time-invariant/long-term) and transient (time-varying/short-term) technical inefficiency. The model gives us a four-way error component model, viz., persistent and time-varying inefficiency, random firm effects and noise. We use Bayesian methods of inference to provide robust and efficient methods of estimating inefficiency components in this four-way error component model. Monte Carlo results are provided to validate its performance. We also present results from an empirical application that uses a large panel of US commercial banks