The stochastic distance function model is extended to allow for the inefficiency component of the error term to be autocorrelated, as implied by a dynamic model of firm behavior. The autocorrelation parameter can then be interpreted as a measure of the persistence of inefficiency. The model is viewed from a state‐space perspective, and Kalman filtering techniques are proposed for estimation. The model is applied to two panels of dairy farms from Germany and the Netherlands. The results suggest a very high degree of persistence of inefficiency through time.
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Emvalomatis et al. (2011) studied this question.
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