A Time-Varying True Individual Effects Model with Endogenous Regressors

45 Pages Posted: 26 Jan 2016 Last revised: 26 Feb 2019

See all articles by Levent Kutlu

Levent Kutlu

University of Texas at Arlington - Department of Economics

Kien Tran

University of Lethbridge

Efthymios G. Tsionas

Lancaster University

Date Written: November 16, 2018

Abstract

We propose a fairly general individual effects stochastic frontier model, which allows both heterogeneity and inefficiency to change over time. Moreover, our model handles the endogeneity problems if either at least one of the regressors or one-sided error term is correlated with the two-sided error term. Our Monte Carlo experiments show that our estimator performs well. We employed our methodology to the US banking data and found a negative relationship between return on revenue and cost efficiency. Estimators ignoring time-varying heterogeneity or endogeneity did not perform well and gave very different estimates compared to our estimator.

Keywords: Endogeneity, Panel data, Stochastic frontier, True fixed effects

JEL Classification: C13, C23, C36

Suggested Citation

Kutlu, Levent and Tran, Kien and Tsionas, Efthymios G., A Time-Varying True Individual Effects Model with Endogenous Regressors (November 16, 2018). Available at SSRN: https://ssrn.com/abstract=2721864 or http://dx.doi.org/10.2139/ssrn.2721864

Levent Kutlu (Contact Author)

University of Texas at Arlington - Department of Economics ( email )

University of Texas at Arlington, Economics Depart
Arlington, TX 76010
United States

Kien Tran

University of Lethbridge ( email )

4401 University Drive
Lethbridge, Alberta T1K 3M4
Canada

Efthymios G. Tsionas

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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