EFFICIENCY ESTIMATION WITH HETEROSCEDASTICITY IN A PANEL DELTA-MODEL

This paper deals with the estimation of efficiency in a panel data fra mework. A one-way error component model (ECM) is generalized to accomm odate firm-specific variances for the inefficiency component. A multi- step procedure is developed to estimate the cost function and predict increase in cost due to inefficiency. The model is applied to examine efficiency of ten major investor owned electric utilities in Texas dur ing 1966-1985. The production technology is represented by a translog cost function that is assumed to be the same for every utility (except for heterogeneous intercepts), but it is allowed to shift over time d ue to technical change. The data supports the ECM with firm-specific v ariances and rejects the homoscedastic ECM. Cost inefficiency is found to vary substantially across utilities ranging from 0 to 28%. Technic al change is found to be quite small (less than +/- 1%), especially du ring 1971-1985.