Quality as a latent heterogeneity factor in the efficiency of universities

A B S T R A C T

In this paper we show the usefulness of recent advanced nonparametric efficiency techniques to model the performance
of universities in the presence of observed and unobserved heterogeneity. Using directional distances
for benchmarking purposes, we identify a latent heterogeneity factor related to the human capital of the universities
and their management, that is independent from their size, and interpret the identified latent factor as a
“quality” factor of the universities. After testing the significance of this latent factor, we investigate its impact on
the boundary of the production set (efficient frontier) and on the distances of the units from the efficient frontier.
The frontier and the efficiency distribution of our European Universities sample appear influenced by our
estimated latent quality factor. We investigate these impacts from various points of view, including the trade-off
between our quality factor and efficiency as well as the roles of size and specialization.