A generalized inefficiency model with input and output dependence

In this paper we propose a general inefficiency model, in the sense that technical inefficiency is, simul-taneously, a function of all inputs, outputs, and contextual variables. We recognize that change in in-efficiency is endogenous or rational, and we propose an adjustment costs model with firm-specific but unknown adjustment cost parameters. When inefficiency depends on inputs and outputs, the firm's opti-mization problem changes as the first order conditions must take into account the dependence of ineffi-ciency on the endogenous variables of the problem. The new formulation introduces statistical challenges which are successfully resolved. The model is estimated using Maximum Simulated Likelihood and an empirical application to U.S. banking is provided.& COPY; 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )