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Valid tests of whether technical inefficiency depends on firm characteristics

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  • Kim, Myungsup
  • Schmidt, Peter

Abstract

We wish to test whether technical inefficiency depends on observable characteristics of the firm. We consider a two-step procedure in which the second step is a regression of estimated inefficiency on firm characteristics. A valid test of the hypothesis of no effect requires an adjustment to the variance matrix of the estimates. Unfortunately the adjustment is not distribution-free. We show that this test is the LM test in the exponential case. We also consider tests based on nonlinear least squares, which do not require a distributional assumption. The size and power of these tests are examined in simulations.

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  • Kim, Myungsup & Schmidt, Peter, 2008. "Valid tests of whether technical inefficiency depends on firm characteristics," Journal of Econometrics, Elsevier, vol. 144(2), pages 409-427, June.
    • Handle: RePEc:eee:econom:v:144:y:2008:i:2:p:409-427
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    Cited by:

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    3. Subal C. Kumbhakar & Christopher F. Parmeter & Valentin Zelenyuk, 2022. "Stochastic Frontier Analysis: Foundations and Advances I," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 8, pages 331-370, Springer.
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    5. Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2014. "Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry," Operations Research Perspectives, Elsevier, vol. 1(1), pages 6-17.
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    9. Parmeter, Christopher F. & Simar, Léopold & Van Keilegom, Ingrid & Zelenyuk, Valentin, 2024. "Inference in the nonparametric stochastic frontier model," LIDAM Reprints ISBA 2024013, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).

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