This paper considers models with time-varying individual effects (also known as factor models). The paper extends Ahn, Lee and Schmidt, Journal of Econometrics, 2001 and Bai, Econometrica, 2003 to allow a parametric function of time for the time factor. It provides a fixed-effects treatment of...

Let u ≥ 0 be technical inefficiency, let z be a set of variables that affect u, and let δ be the parameters of this relationship. The model satisfies the scaling property if u(z, δ) can be written as a scaling function h(z, δ) times a random variable u* that does not depend on z. This...