where c is the transformed administrative cost, Ž . x is an observable exogenous it 1it
variable and x is also exogenous but unobserved. ´ is a zero mean i.i.d. error 2 it it
term reflecting unobservable exogenous factors which do not influence managerial
effort and are uncorrelated with the x1it , x2 it. Assume that the unobserved
variable is correlated with the observed: