This paper uses panel data to estimate a two-tiered instead of a one-tiered frontier model. The innovation is to develop a two-step maximum likelihood procedure yielding consistent estimates of inefficiency, while at the same time accounting for heterogeneity. The model is applied by estimating...

This pap er develops a "two-tiered frontier" estimation procedure to decompose the residual of an earnings function into three components. The first component can be interpreted as being purely random. Search theory is used to show that the other two components represent employee and employer...