Transport firms’ inefficiency and managerial optimism: A stochastic frontier analysis

Abstract

This paper presents an original essay that explains the correlation between transport firms’ technical efficiency and managerial optimism. We initiate a debate concerning the potential role of Chief Executive Officers’ (CEO) irrationalities in explaining the inefficiency of public transport operators, such as the shortfall between the optimal production function and the observed production level. Stochastic frontier analysis (SFA) methods are applied to our sample over a twelve-year period from 2000 to 2011, where we aim to detect the potential effect of a well-documented bias in behavioral economic and finance theory: the managerial optimism bias. Using two proxies of managerial optimism based on the 2005 work of Malmendier and Tate as well as following recommendations of cognitive psychology and using an SFA approach, we find strong evidence of the negative impact of CEOs’ optimism bias on transport firms’ technical efficiency, meaning that managerial optimism decreases transport firms’ technical efficiency.