A Switching Frontier Model for Imperfect Sample Separation Information: With an Application to Constrained Labor Supply.

This paper combines frontier functions and switching regressions. This allows economic agents to operate under different efficiency 'regimes,' thus relaxing the assumption that all observations are drawn from the same distribution of inefficiency. The 'switch' is based on sample separation information that is treated first as perfect, then as imperfect (or noisy). Available sample separation information suggests an observation's regime, however the information may not be accurate. By comparing results across alternative specifications of sample separation information as perfect and noisy, this approach provides evidence on the quality of the sample separation information. The technique's usefulness is demonstrated via an application to constrained labor supply. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.