Stochastic cost frontier and cost inefficiency of Japanese hospitals: a panel data analysis

Abstract

This letter considers the following two questions: How much are the estimates of the parameters of stochastic cost frontier and cost inefficiency of Japanese hospitals affected (1) by the utilization of the panel structure of data in estimation; and (2) by considering a hospital-specific intercept in the cost frontier? Three models are estimated: a stochastic cost frontier model with a hospital-specific intercept treated as a random variable for panel data; a stochastic cost frontier model without a hospital-specific intercept for panel data; and the conventional stochastic frontier model that treats the data as if they were cross-sectional. The main findings are: (1) the introduction of panel structure into the frontier estimation changes the cost inefficiency estimate significantly compared with the estimate based on cross-sectionally treated data; (2) the intercept of the cost frontier is significantly different among hospitals.