A Time-Varying True Individual Effects Model with Endogenous Regressors
45 Pages Posted: 26 Jan 2016 Last revised: 26 Feb 2019
Date Written: November 16, 2018
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: Suggested Citation