Journal of Productivity Analysis

, Volume 39, Issue 2, pp 101–110

Investigating the impact of endogeneity on inefficiency estimates in the application of stochastic frontier analysis to nursing homes

Authors

    • Center for Delivery, Organization and MarketsAgency for Healthcare Research and Quality
  • William H. Greene
    • Stern School of BusinessNew York University
  • William Spector
    • Center for Delivery, Organization and MarketsAgency for Healthcare Research and Quality
  • Michael D. Rosko
    • School of Business AdministrationWidener University
  • Dana B. Mukamel
    • Department of Medicine, Health Policy Research InstituteUniversity of California, Irvine
Article

DOI: 10.1007/s11123-012-0277-z

Cite this article as:
Mutter, R.L., Greene, W.H., Spector, W. et al. J Prod Anal (2013) 39: 101. doi:10.1007/s11123-012-0277-z

Abstract

This paper examines the impact of an endogenous cost function variable on the inefficiency estimates generated by stochastic frontier analysis (SFA). The specific variable of interest in this application is endogenous quality in nursing homes. We simulate a dataset based on the characteristics of for-profit nursing homes in California, which we use to assess the impact on SFA-generated inefficiency estimates of an endogenous regressor under a variety of scenarios, including variations in the strength and direction of the endogeneity and whether the correlation is with the random noise or the inefficiency residual component of the error term. We compare each of these cases when quality is included and excluded from the cost equation. We provide evidence of the impact of endogeneity on inefficiency estimates yielded by SFA under these various scenarios and when the endogenous regressor is included and excluded from the model.

Keywords

Stochastic frontier analysisEndogeneityEfficiencyQualityNursing homes

JEL Classification

C13C15I12

Copyright information

© Springer Science+Business Media, LLC (outside the USA) 2012