Bounding endogenous regressor coefficients using moment inequalities and generalized instruments

The main approach to deal with regressor endogeneity is instrumental variable estimator (IVE), where an instrumental variable (IV) m is required to be uncorrelated to the regression model error term u (COR(m,u)=0) and correlated to the endogenous regressor. If COR(m,u)≠0 is likely, then m gets discarded. But even when COR(m,u)≠0, often one has a good idea on the sign of COR(m,u). This article shows how to make use of the sign information on COR(m,u) to obtain an one‐sided bound on the endogenous regressor coefficient, calling m a ‘generalized instrument’ or ‘generalized instrumental variable (GIV)’. If there are two GIV's m₁ and m₂, then a two‐sided bound or an improved one‐sided bound can be obtained. Our approach is simple, needing only IVE; no non‐parametrics, nor any ‘tuning constants’. Specifically, the usual IVE is carried out, and the only necessary modification is that the estimate for the endogenous regressor coefficient is interpreted as a lower/upper bound depending on the prior notion on the sign of COR(m,u) and some estimable moment. A real data application is done to Korean household data with two or more children to illustrate our approach for the issue of child quantity–quality trade‐off.     

An analysis of the cost of providing ancillary services to skilled nursing facility patients in New York State

Currently, nursing homes can arrange for the provision of ancillary services either by providing the services directly, purchasing the services through contracts and fees, or by outside billings, in which the services are supplied by other providers who then bill Medicaid directly. Frequently, some combination of these three modes of provision is used for each ancillary service. The purpose of this study is to explore ancillary costs in a sample of nursing homes and to determine, to the extent possible, the most cost-efficient means of providing selected ancillary services (physical therapy, radiology and medical staff services). Prior to examining the impact of the mode of provision on cost levels, other facility and patient characteristics that might justifiably affect costs are identified and adjusted for. The results demonstrate that outside billing or purchasing services can be much less expensive than providing the services directly. It is suggested that all ancillary services (outside billings as well as services provided directly through contracts and fees) be included when facility-to-facility cost comparisons are made. This approach should serve as an incentive for nursing homes to seek the most cost-efficient means of providing ancillary services.     

Cost (In)Efficiency and Institutional Pressures in Nursing Home Chains

Over the past 10 years, merger activities in the private for-profit nursing home industry have been increasing in Europe. In this paper, we investigate chain affiliation’s influence on the performance of lucrative nursing homes. We measure performance using a cost frontier estimated by stochastic analysis on a sample of 370 French for-profit nursing homes. We find that cost efficiency decreases with the number of facilities in a chain. We also identify different external actor types in nursing homes’ institutional environment and test their influence. We show that nursing home chains’ cost efficiency improves when local governments and shareholders exert pressure. Our results are robust to alternative model specifications and another definition of costs. Overall, our findings inform researchers, as well as standards setters, of the relevance of chain affiliation and of the role of institutional pressures regarding cost containment at the nursing home level.     

Expansion and Efficiency in Banking: Evidence from Ghana

We use a translog functional form to estimate a stochastic frontier function of cost and profit efficiency (PE) of Ghanaian banks under the Battese–Coelli time‐varying decaying inefficiency parameterization for (unbalanced) panel data. We regressed efficiency estimates on a distance variable controlling for bank size, total cost, and profits. We find that Ghanaian bank PE is worsening, whereas cost efficiency is improving for the period analyzed. Our results show that PE is not related to distance, size, or cost and profitability ratios. Distance is however positively and significantly related to cost efficiency. Cost efficiency is however not influenced by size or cost and profit ratios. Copyright © 2011 John Wiley & Sons, Ltd.     

Corporate Opacity and Cost of Debt for Family Firms

This paper uses a sample of Chinese firms to examine the impact of corporate opacity on the relationship between family control and firms’ cost of debt. We find that family control is associated with a lower cost of debt on average, and a negative impact exists mainly in firms with relatively low corporate opacity. We further provide evidence that the moderating effect of corporate opacity becomes more pronounced when investors’ perception of controlling families’ moral hazard of expropriation is higher. Our results are robust to alternative opacity proxies and controlling for endogeneity of family control using the instrumental variable method. Our study highlights that controlling families are heterogeneous in their impact on the shareholder–debtholder relationship in family firms, and debtholders view corporate opacity as an important reference in assessing the extent of potential agency conflicts in China.     

Housing tenure choice and the dual income household

Housing tenure choice has been the subject of a very large literature. Many treatments have sought to estimate the effect of household income on the likelihood of home ownership. To date, no study has ever disaggregated the household income of married couples into the separate labor income components to see if one partner’s income has a different effect than the other. Using a derived likelihood function to control for censoring in the wife’s income, this paper estimates the effect of separate incomes on housing tenure choice, accounting for possible endogeneity of the wife’s income. To compare the results of this estimation method, the paper also estimates the standard IV models, 2SLS and IV probit. While the results show that there is no endogeneity of the wife’s income, ignoring the censoring of the endogenous variable (when a large fraction of observations are censored) can possibly lead to biased coefficient estimates. Also, this paper confirms the importance of total household income, which has a larger effect than the total disaggregated components.     

Accounting for Environmental Effects and Statistical Noise in Data Envelopment Analysis

In this paper we propose a new technique for incorporating environmental effects and statistical noise into a producer performance evaluation based on data envelopment analysis (DEA). The technique involves a three-stage analysis. In the first stage, DEA is applied to outputs and inputs only, to obtain initial measures of producer performance. In the second stage, stochastic frontier analysis (SFA) is used to regress first stage performance measures against a set of environmental variables. This provides, for each input or output (depending on the orientation of the first stage DEA model), a three-way decomposition of the variation in performance into a part attributable to environmental effects, a part attributable to managerial inefficiency, and a part attributable to statistical noise. In the third stage, either inputs or outputs (again depending on the orientation of the first stage DEA model) are adjusted to account for the impact of the environmental effects and the statistical noise uncovered in the second stage, and DEA is used to re-evaluate producer performance. Throughout the analysis emphasis is placed on slacks, rather than on radial efficiency scores, as appropriate measures of producer performance. An application to nursing homes is provided to illustrate the power of the three-stage methodology.     

WHU Invitation and Call for Applications

Abstract

The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, this issue, pp. 173–195). We focus on the econometric problems researchers encounter when investigating the performance effects of some endogenous firm choice. Our points are illustrated using the classic research question about the relation between managerial equity ownership and firm value. We consider cases where ownership is treated as an exogenous, endogenous and ‘partially’ endogenous variable. We argue treating ownership as an exogenous variable is seriously flawed. Unfortunately, when ownership is at least partially endogenous, it is necessary for empirical researchers to identify exogenous variables that are the determinants of the ownership choice. This calls for better theory to guide the empirical work.     

Disentangling the efficiency drivers in country-level global health programs: An empirical study

Motivated by the cost reductions and outcome improvements generated by benchmarking in many industries, we focus on in-country global health programs to identify and quantify opportunities for process improvement. We empirically study the major efficiency drivers of reproductive health (RH) country programs in Sub-Saharan Africa sponsored by international funding organizations. To ensure a level playing field for comparison across countries, we quantify the impact of cross-country heterogeneity and random shocks on the efficiency of RH programs. To analyze these relationships and isolate the effects attributable to managerial inefficiency, we use a three-stage Data Envelopment Analysis (DEA)/Stochastic Frontier Analysis (SFA) model. We show the impact of environmental factors on program efficiency, linking policy making decisions with operational and health outcome performance. We also show that donor fragmentation negatively impacts managerial efficiency, and we suggest actions to mitigate this effect. We then provide a way to improve performance through benchmarking efforts within groups of countries and present an initial prototype of such efforts.     

A stochastic frontier analysis to estimate the relative efficiency of Spanish airports

There exists a common belief among researchers and regional policy makers that the actual central system of Aeropuertos Españoles y Navegación Aérea (AENA) should be changed to one more decentralized where airport managers could have more autonomy. The main objective of this article is to evaluate the efficiency of the Spanish airports using Markov chain Monte Carlo (MCMC) simulation to estimate a stochastic frontier analysis (SFA) model. Our results show the existence of a significant level of inefficiency in airport operations. Additionally, we provide efficient marginal cost estimates for each airport which also cast some doubts about the current pricing practices.     

Linear programming-based estimators in simple linear regression

In this paper we introduce a linear programming estimator (LPE) for the slope parameter in a constrained linear regression model with a single regressor. The LPE is interesting because it can be superconsistent in the presence of an endogenous regressor and, hence, preferable to the ordinary least squares estimator (LSE). Two different cases are considered as we investigate the statistical properties of the LPE. In the first case, the regressor is assumed to be fixed in repeated samples. In the second, the regressor is stochastic and potentially endogenous. For both cases the strong consistency and exact finite-sample distribution of the LPE is established. Conditions under which the LPE is consistent in the presence of serially correlated, heteroskedastic errors are also given. Finally, we describe how the LPE can be extended to the case with multiple regressors and conjecture that the extended estimator is consistent under conditions analogous to the ones given herein. Finite-sample properties of the LPE and extended LPE in comparison to the LSE and instrumental variable estimator (IVE) are investigated in a simulation study. One advantage of the LPE is that it does not require an instrument.     

New monetarism with endogenous product variety and monopolistic competition

I examine the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. I integrate free entry, product variety and monopolistic competition into a New Monetarist framework, considering preferences that give rise to either constant or variable markups. I find that inflation generally reduces variety. Under CES preferences, firms are inefficiently small, with the inefficiency increasing with product differentiation and the extent of search frictions. The Friedman rule is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, this cost increases monotonically with the markup and is higher with endogenous variety than with a fixed product space.     

Under pressure: community water systems in the United States—a production model with water quality and organization type effects

This paper examines the interaction of productive efficiency, water quality and organizational type. A water quality index is constructed employing various contaminants which are then treated together with variables including organizational type as endogenous in an input distance function model. The cost of drinking water quality and inefficiency are derived and hypothesis tests estimated concerning their variation by location, organization type and water quality. The key findings are that more technically efficient water utilities deliver higher quality drinking water and that private firms distribute higher quality water at a higher price and at a higher implicit cost than public utilities despite no overall inefficiency differences between the two organizational types.     

Exploring the relationship between job satisfaction and organizational commitment: an instrumental variable approach

Abstract

The possible role of job satisfaction (JS) on organizational commitment (OC) has been a very important and hotly debated topic among experts. However, existing studies have yielded mixed results potentially due to utilization of small datasets, different methodological designs, estimation techniques that do not control for potential endogeneity between the variables, or a combination of these issues. Using a large matched employer-employee data-set from Britain (WERS2011), we find that increases in employees’ JS positively influence OC. We also show that this relationship holds when an instrumental variable framework (IV ordered probit/IV probit) is adopted to take into account the potential endogeneity of JS. However, throughout the analysis, the IV estimates are smaller in magnitude in comparison to where JS is considered as an exogenous variable. Moreover, utilising a two-stage probit least square (2SPLS) estimator, we support our previous findings i.e. increased JS is likely to lead to enhanced OC, but we also show that greater OC leads to higher levels of JS suggesting that JS and OC are likely to be reciprocally related. Overall, the IV estimates confirm the importance of addressing the endogeneity issue in the analysis of the relationship between JS and OC.     

Efficiency measurement with multiple outputs and multiple inputs

This paper discusses modeling technical and allocative inefficiencies in both cost minimizing and profit maximizing frameworks with special emphasis on multiple inputs and multiple outputs. Both primal and dual models are considered for this purpose. In the primal approach we use a separable output and input function (the constant elasticity of transformation output function and Cobb-Douglas input function). The dual models assume translog cost or profit functions. Technical inefficiency is assumed to be random in the cross-sectional models, and fixed firm-specific parameter in the panel data models. Allocative inefficiencies are always treated as input-specific parameters. We derive exact relations linking technical inefficiency and allocative inefficiencies to cost and profit when the underlying technology is represented by a flexible functional form such as the translog. It is shown that appending a one-sided homoscedastic error term to model technical inefficiency, or neglecting technical inefficiency altogether in a translog profit tunciton results in model misspecification and inconsistent parameter estimates.     

Towards causal estimates of children's time allocation on skill development

In this paper we examine how children's time allocation affects their accumulation of cognitive skill. Children's time allocation is endogenous in a model of skill production since it is chosen by parents and children. We apply a recently developed test of exogeneity to search for specifications that yield causal estimates of the impact time inputs have on child skills. The test exploits bunching in time inputs induced by a nonnegativity time constraint and it has power to detect a variety of sources of endogeneity. We find that with a sufficiently rich set of controls we are unable to reject exogeneity in our most detailed production function specifications. The estimates from these specifications indicate that active time with adult family members, such as parents and grandparents, are the most productive in generating cognitive skill.     

Optimal inference for instrumental variables regression with non-Gaussian errors

This paper is concerned with inference on the coefficient on the endogenous regressor in a linear instrumental variables model with a single endogenous regressor, nonrandom exogenous regressors and instruments, and i.i.d. errors whose distribution is unknown. It is shown that under mild smoothness conditions on the error distribution it is possible to develop tests which are “nearly” efficient in the sense of Andrews et al. (2006) when identification is weak and consistent and asymptotically optimal when identification is strong. In addition, an estimator is presented which can be used in the usual way to construct valid (indeed, optimal) confidence intervals when identification is strong. The estimator is of the two stage least squares variety and is asymptotically efficient under strong identification whether or not the errors are normal.     

Profitability and Efficiency in the U.S. Life Insurance Industry

This study explores the relationship between cost inefficiency and profitability in the U.S. life insurance industry. Earnings have particular importance to life insurance companies because earnings and capital determine the viability of the insurer. Since the life insurance industry is mature and highly competitive, cost efficiency may be the main driver of profitability. We derive cost efficiency using the stochastic frontier (SF) method allowing the mean inefficiency to vary with organizational form and the outputs. In addition, the estimation of the cost efficiency measure takes into account the underlying accounting concepts that generate the data and, consequently, the product mix (long-duration policies vs. short-duration policies) to avoid distorted estimates. Our results suggest that cost inefficiency in the life insurance industry is substantial relative to earnings, and that inefficiency is negatively associated with profitability measures such as the return on equity. The analysis of inefficiency and organizational form suggest that stock (shareholder-owned) companies are as efficient and profitable as mutual (policyholder-owned) companies.     

Addressing the endogeneity dilemma in operations management research: Theoretical,empirical, and pragmatic considerations

In this paper, we examine the problem of endogeneity in the context of operations management research. Whereas the extant literature has focused primarily on the statistical aspect of the problem, a comprehensive treatment requires an examination of theoretical and pragmatic considerations as complements. The prevailing problem with the focus on statistical techniques is that the standards tend to be derived from idealizations: the correlation between a regressor and a disturbance term must be exactly zero, or the analysis will be invalid. In actual empirical research settings, such a knife-edge assumption can never be satisfied, indeed it cannot even be directly tested. Idealizations are useful in helping us understand what it would take to eliminate endogeneity, but when applied directly and unconditionally, they lead to unreasonable standards that may unnecessarily stifle substantive inquiry. We believe that it is far more productive and meaningful to ask: “What can we realistically expect empirical scientists to be able to achieve?” To this end, we cover and revisit some of the general technical material on endogeneity, paying special attention to the idiosyncrasies of operations management research and what could constitute reasonable criteria for addressing endogeneity in empirical operations management studies.     

Estimation of Markov regime-switching regression models with endogenous switching

Following Hamilton [1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357–384], estimation of Markov regime-switching regressions typically relies on the assumption that the latent state variable controlling regime change is exogenous. We relax this assumption and develop a parsimonious model of endogenous Markov regime-switching. Inference via maximum likelihood estimation is possible with relatively minor modifications to existing recursive filters. The model nests the exogenous switching model, yielding straightforward tests for endogeneity. In Monte Carlo experiments, maximum likelihood estimates of the endogenous switching model parameters were quite accurate, even in the presence of certain model misspecifications. As an application, we extend the volatility feedback model of equity returns given in Turner et al. [1989. A Markov model of heteroskedasticity, risk, and learning in the stock market. Journal of Financial Economics 25, 3–22] to allow for endogenous switching.