On the estimation of zero-inefficiency stochastic frontier models with endogenous regressors

- We investigate endogeneity issues in the zero-inefficiency stochastic frontier.
- Parameters of the model are estimated using a modified LIML approach.
- Prediction of firm specific inefficiency score is also provided.
- The model is extended to allow for all errors to be potentially correlated.

In this paper, we investigate endogeneity issues in the zero-inefficiency stochastic frontier (ZISF) models by mean of simultaneous equation setting. Specifically, we allow for one or more regressors to be correlated with the statistical noise. A modified limited information maximum likelihood (LIML) approach is used to estimate the parameters of the model. Moreover, the firm specific inefficiency score is also provided. Limited Monte Carlo simulations show that the proposed estimators perform well in finite sample.