Open AccessAn Empirical Model of Behavioral Heterogeneity
Author(s) -
Subal C. Kumbhakar,
Efthymios G. Tsionas
Publication year - 2017
Publication title -
review of economic analysis
Language(s) - English
Resource type - Journals
ISSN - 1973-3909
DOI - 10.15353/rea.v8i2.1512
Subject(s) - profit maximization , profit (economics) , econometrics , economics , microeconomics , minification , maximization , deregulation , computer science , mathematical optimization , mathematics , macroeconomics
In this paper we propose a new latent class/mixture model (LCM) to determine whether firms behave like profit maximizers or just cost minimizers when there is no additional sample separation information. Since some firms might be maximizing profit while others might minimize cost, the LCM with behavioral heterogeneity can be quite useful. Estimation of the LCM amounts to mixing a cost minimization and a profit maximization model. Using the U.S. airlines data we find that after deregulation about 15% of the airlines are found to be consistent with profit maximizing behavior.