Distinguishing between heterogeneity and inefficiency: stochastic frontier analysis of the World Health Organization's panel data on national health care systems

The most commonly used approaches to parametric (stochastic frontier) analysis of efficiency in panel data, notably the fixed and random effects models, fail to distinguish between cross individual heterogeneity and inefficiency. This blending of effects is particularly problematic in the World Health Organization's (WHO) panel data set on health care delivery, which is a 191 country, 5-year panel. The wide variation in cultural and economic characteristics of the worldwide sample produces a large amount of unmeasured heterogeneity in the data. This study examines several alternative approaches to stochastic frontier analysis with panel data, and applies some of them to the WHO data. A more general, flexible model and several measured indicators of cross country heterogeneity are added to the analysis done by previous researchers. Results suggest that there is considerable heterogeneity that has masqueraded as inefficiency in other studies using the same data.