In this paper we consider a fixed-effects stochastic frontier model. That is, we have panel data, fixed individual (firm) effects, and the usual stochastic frontier analysis (SFA) composed error.

Traditional panel stochastic frontier models do not distinguish between unobserved individual heterogeneity and inefficiency. They thus force all time-invariant individual heterogeneity into the estimated inefficiency. Greene (2005) proposes a true fixed-effect stochastic frontier model which,...