As the first term in 22 makes clear, the estimated area specific effects can also Ž .
reflect the impact of unobserved variables Ž .Ž . x Dor, 1994; Newhouse, 1994 . 2 it
The area effects measure differences in managerial effort and therefore potential
welfare gains only if the unobserved variables a do not vary systematically Ž .
across areas Ž . Ž. f0 is0, ;i or b do not affect the cost function, either directly
Ž. Ž . d s0 or indirectly through managerial effort a s0 .