Unobserved Heterogeneity and Efficiency Measurement in Public Transport

Efficiency measurement in public transport requires an adequate account of unobserved network characteristics that are typically modeled as factors separable from the production process. This paper proposes a panel data model that allows for nonseparable firm-specific heterogeneity in an input distance function. The proposed model is applied to a sample of German and Swiss urban transit companies operating from 1991 to 2006. The results underline the presence of non-separable unobserved factors and their effects on technological characteristics such as returns to scale. Moreover, the data suggest that the effect of time-invariant heterogeneity could be significantly greater than technical inefficiency. Date of final version: 27 July 2010