UNCORRECTED PROOF DOI 10.1007/s00181-005-0045-2 ORIGINAL PAPER Efthymios G. Tsionas . Theodore A. Papadogonas Firm exit and technical inefficiency Received: 9 November 2004 / Accepted: 24 May 2005 / Published online: 30 March 2006 © Springer-Verlag 2006 Abstract The purpose of the paper is to examine formally the fundamental implication that technical inefficiency (TI) is related to firm exit. Traditional stochastic frontier models allow for the measurement of TI but do not allow for a direct effect of TI on exit. We propose a model which allows for such effects and consists of a stochastic frontier model, and an additional equation that describes the probability of exit as a function of covariates and TI. Since TI is unobserved, econometric complications arise, and obtaining consistent estimates is non-trivial due to the presence of integrals in the likelihood function. We propose and im- plement maximum likelihood estimation one step, employing data for 3,404 manufacturing firms in Greece. We find significant positive effects from TI on the probability of exit. We also propose and provide measures of TI that respect the fact that unobserved TI affects the probability of exit and compare them to TI measures from the traditional stochastic frontier model. Keywords Exit . Technical inefficiency . Stochastic frontier models JEL Classification C21 . C23 1 Introduction Stochastic frontier models are part of the arsenal of applied researchers working in many different fields. The measurement of technical inefficiency (TI) has always been thought to be extremely important for applied policy analysis and industrial E. G. Tsionas (*) Department of Economics Athens, University of Economics and Business, 76 Patission Street, Athens 104 34, Greece E-mail: tsionas@aueb.gr T. A. Papadogonas Department of Accounting and Finance, Athens University of Economics and Business, 76 Patission Street, Athens 104 34, Greece E-mail: tpapadogonas@yahoo.com Empirical Economics 31:535–548 (2006)