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First, we set out a simple model of managerial effort and administrative costs.We use the model to examine the welfare implications of endogenous managerialeffort and the estimation of efficiency in health care by standard econometricŽ methods Schmidt and Sickles, 1984 . The paper complements and extends thedebate in the Symposium on Frontier Estimation in the Journal of HealthEconomics1 which focused on alternative methods for estimating efficiency, ratherthan on the welfare interpretation of the estimates.
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