PANEL ESTIMATES OF A 2-TIERED EARNINGS FRONTIER

This paper uses panel data to estimate a two-tiered instead of a one-t iered frontier model. The innovation is to develop a two-step maximum likelihood procedure yielding consistent estimates of inefficiency, wh ile at the same time accounting for heterogeneity. The model is applie d by estimating a 'two-tiered' earnings function to obtain indices of worker and firm incomplete labour market wage information using panel data from the Panel Study of Income Dynamics (1969-84). The estimation preserves the traditional quadratic age-earnings profile, but measure s the extent to which employers often pay more than necessary to hire a worker (incomplete employer information), while at the same time, em ployees often accept wages less than they could otherwise command (inc omplete employee information). The results indicate that employees acq uire less information than employers.