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suggestions. We are also deeply indebted to the many administrators, scientists, managers, and entrepreneurs who agreed to be interviewed. Martha Cobb and Melissa

The most commonly used approaches to parametric (stochastic frontier) analysis of efficiency in panel data, notably the fixed and random effects models, fail to distinguish between cross individual heterogeneity and inefficiency. This blending of effects is particularly problematic in the World Health Organization’s (WHO) panel data set on health care delivery, which is a 191 country, five year panel. The wide variation in cultural and economic characteristics of the worldwide sample of countries produces a large amount of unmeasured heterogeneity in the data. Familiar approaches to inefficiency estimation mistakenly measure that heterogeneity as inefficiency. This study will examine a large number of recently developed alternative approaches to stochastic frontier analysis with panel data, and apply some of them to the WHO data. A more general, flexible model and several measured indicators of cross country heterogeneity are added to the analysis done by previous researchers. Results suggest that in these data, there is considerable evidence of heterogeneity that in other studies using the same data, has masqueraded as inefficiency. Our results differ substantially from those obtained by

Consider a stochastic frontier model with one-sided inefficiency u, and suppose that the scale of u depends on some variables (firm characteristics) z. A “one-step ” model specifies both the stochastic frontier and the way in which u depends on z, and can be estimated in a single step, for example by maximum likelihood. This is in contrast to a “two-step” procedure, where the first step is to estimate a standard stochastic frontier model, and the second step is to estimate the relationship between (estimated) u and z. In this paper we propose a class of one-step models based on the “scaling property ” that u equals a function of z times a one-sided error u ∗ whose distribution does not depend on z. We explain theoretically why two-step procedures are biased, and we present Monte Carlo evidence showing that the bias can be very severe. This evidence argues strongly for one-step models whenever one is interested in the effects of firm characteristics on efficiency levels.

We thank Tim Coelli for his continued help throughout this project; seminar participants

0305-750X/03/ $- see front matter doi:10.1016/S0305-750X(03)00004-4

We investigate the determinants of the efficiency of firms with a focus on the role of corruption. We construct a simple theoretical model where corruption causes a diversion of managerial effort away from factor coordination, in turn increasing the factor requirements of firms. We then exploit a unique dataset comprising firm-level information on 80 electricity distribution firms from 13 Latin American countries for the years 1994 to 2001. As predicted by the model, we find that more corruption in the country is strongly associated with more inefficient firms, in the sense that they will employ more inputs to produce a given level of output. The economic magnitude of the effects is large. The results hold under the two different measures of corruption we use (indices by ICRG and Transparency International), and survive various robustness checks. Important controls in our regressions are public vs. private ownership and the regulatory regime. JEL Classification: D21, L94, D78.

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In the French urban public transport industry, services are often delegated to a private firm by the mean of a fixed-term regulatory contract. This contract specifies the duties of the firm and a financial compensation. When it expires, a new contract is awarded, possibly to a different operator. Cost-plus and fixed-price (gross cost or net cost) contracts are commonly used to regulate the operators in the transport industry. In this paper, we analyse the incentives for the operator to reduce its cost. These incentives come from both the profit maximization during the current contract and the perspective of contract renewal. In our model, the amount of cost-reducing effort depends on the contract type and the time remaining till contract expiration. We use a sample of 124 French urban public transport networks covering the period 1995-2002 to test our predictions. Our proxy for the cost reducing effort is technical efficiency. The data largely confirm the importance of contract type on performances and the incentive effect of contract renewal.

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