Estimating Fixed Effects Stochastic Frontier Panel Models Under ‘Wrong’ Skewness with an Application to Health Care Efficiency in Germany

38 Pages Posted: 6 May 2022 Last revised: 2 May 2024

See all articles by Rouven E. Haschka

Rouven E. Haschka

University of Cologne

Dominik Wied

University of Cologne

Date Written: September 19, 2022

Abstract

Typically, the inefficiency term in stochastic frontier models is assumed to be positively skewed; however, efficiency scores are biased if this assumption is violated. This paper considers the case in which also negative skewness is allowed in the model. The paper discusses estimation of a stochastic frontier panel model with unobserved fixed effects without having to identify additional parameters that determine skewness of inefficiency. On the one hand, the parameters can be estimated via integrating out nuisance parameters by means of marginal maximum likelihood. On the other hand, we propose an approximation based on closed skew normal distributions which turns out to be sufficiently accurate for maximum likelihood estimation. Simulations assess finite sample performances of estimators and show that all model parameters and efficiency scores can be estimated consistently regardless of positive or negative inefficiency skewness. An empirical analysis to unravel inefficiencies in the German healthcare system demonstrates the practical relevance of the model.

Keywords: Fixed effects, panel data, skewness, stochastic frontier analysis

JEL Classification: C23, D24, I11, I18

Suggested Citation

Haschka, Rouven E. and Wied, Dominik, Estimating Fixed Effects Stochastic Frontier Panel Models Under ‘Wrong’ Skewness with an Application to Health Care Efficiency in Germany (September 19, 2022). Available at SSRN: https://ssrn.com/abstract=4079660 or http://dx.doi.org/10.2139/ssrn.4079660

Rouven E. Haschka

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Dominik Wied (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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