**Authors**: Kumbhakar, Subal C.; Peresetsky, Anatoly; Shchetynin, Yevgenii; Zaytsev, Alexey

**Abstract:**This paper formally proves that if inefficiency (

*u*) is modelled through the variance of

*u*which is a function of

*z*then marginal effects of

*z*on technical inefficiency (

*TI*) and technical efficiency (

*TE*) have opposite signs. This is true in the typical setup with normally distributed random error

*v*and exponentially or half-normally distributed

*u*for both conditional and unconditional

*TI*and

*TE*. We also provide an example to show that signs of the marginal effects of

*z*on

*TI*and

*TE*may coincide for some ranges of

*z*. If the real data comes from a bimodal distribution of

*u*, and we estimate model with an exponential or half-normal distribution for

*u*, the estimated efficiency and the marginal effect of

*z*on

*TE*would be wrong. Moreover, the rank correlations between the true and the estimated values of

*TE*could be small and even negative for some subsamples of data. This result is a warning that the interpretation of the results of applying standard models to real data should take into account this possible problem. The results are demonstrated by simulations.

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