An Empirical Model of Behavioral Heterogeneity

  • Subal C Kumbhakar Professor, SUNY, Binghamton
  • Mike G Tsionas Lancaster University Management School & Athens University of Economics and Business

Abstract

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. 

Author Biographies

Subal C Kumbhakar, Professor, SUNY, Binghamton
Distinguished Professor, Department of Economics
Mike G Tsionas, Lancaster University Management School & Athens University of Economics and Business
Professor, Department of Economics
Published
2017-02-04
Section
Articles