Valid tests of whether technical inefficiency depends on firm characteristics

Myungsup Kim and Peter Schmidt

Journal of Econometrics, 2008, vol. 144, issue 2, 409-427

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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:144:y:2008:i:2:p:409-427

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