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A time-varying true individual effects model with endogenous regressors

Levent Kutlu, Kien Tran () and Mike Tsionas

Journal of Econometrics, 2019, vol. 211, issue 2, 539-559

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; Time-varying heterogeneity (search for similar items in EconPapers)
JEL-codes: C13 C23 C36 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jeconom.2019.01.014

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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