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A generalized inefficiency model with input and output dependence

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Published
<mark>Journal publication date</mark>1/01/2024
<mark>Journal</mark>European Journal of Operational Research
Issue number1
Volume312
Number of pages9
Pages (from-to)315-323
Publication StatusPublished
Early online date18/08/23
<mark>Original language</mark>English

Abstract

In this paper we propose a general inefficiency model, in the sense that technical inefficiency is, simultaneously, a function of all inputs, outputs, and contextual variables. We recognize that change in inefficiency is endogenous or rational, and we propose an adjustment costs model with firm-specific but unknown adjustment cost parameters. When inefficiency depends on inputs and outputs, the firm's optimization problem changes as the first order conditions must take into account the dependence of inefficiency on the endogenous variables of the problem. The new formulation introduces statistical challenges which are successfully resolved. The model is estimated using Maximum Simulated Likelihood and an empirical application to U.S. banking is provided.