Endogeneity in panel stochastic frontier models: an application to the Japanese cotton spinning industry

ABSTRACT

We present a panel stochastic frontier model that handles the endogeneity problem. This model can treat the endogeneity of both frontier and inefficiency variables. We apply our method to examine the technical efficiency of Japanese cotton spinning industry. Our results indicate that market concentration is endogenous, and when its endogeneity is properly handled, it has a larger negative impact on the technical efficiency of cotton spinning plants. We find that the exogenous model substantially overestimates efficiency in concentrated markets.

KEYWORDS:

• Stochastic frontier
• panel data
• endogeneity
• efficiency
• Japan
• cotton industry

JEL CLASSIFICATION:

• C13
• D24

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Guan et al. (2009) is another GMM-based estimator that is solving endogeneity of frontier variables.

² See also Amsler, Prokhorov, and Schmidt (2016) for another cross sectional study.

³ We programmed the estimator using Stata 13. The Stata ado files are available upon request.

⁴ For more details about the data set, see Braguinsky et al. (2015).

⁵ This measure is based on raw data collected from the website of Geospatial Information Authority of Japan at http://www.gsi.go.jp/.