Accounting for Background Variables in Stochastic Frontier Analysis

The question of how to model background variables in stochastic frontier analysis is seldom discussed in the literature. Some studies, following on from a long history of two-step TFP studies, include them in the determinants of efficiency. Others include them in the frontier itself. We propose a statistical method to obtain the appropriate specification of the influences on costs and inefficiency. We provide the example of a stochastic cost frontier for a panel of English and Welsh universities.