This paper estimates a multiple-output hospital cost function using a panel data technique that allows for correlation between unobservable individual effects and observable determinants of behavior. Analysis of 1733 facilities for the period of 1987–1991 yields estimates that differ widely from those obtained from a more standard cross-sectional procedure. While the latter method results in negative and stable measures of ray economies of scale, the panel model indicates positive economies of scale that fall slightly over time.

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