Heteroskedastic inefficiency in a cost frontier model: An application to nuclear power plant construction costs

This paper adapts the use of a stochastic cost frontier by allowing for heteroskedasticity in the inefficiency error term. Results from nuclear power construction costs indicate that a heteroskedastic inefficiency cost frontier model is preferable to ordinary least squares estimates and a homoskedastic cost inefficiency model. In fact the homoskedastic model is unable to detect the presence of cost inefficiency. We find that the variance of the cost inefficiency increased over time and perhaps decreased with the experience of the architects and engineers on the project.