Estimating efficiency and its determinants in the hotel sector using a profit function

Inefficiency in the hotel sector is normally estimated through cost and scale efficiencies. This paper estimates hotel profit efficiency and its determinants employing a stochastic frontier profit function and the inefficiency effects function. The key advantage of this methodology is its ability to estimate efficiency for each hotel and the factors that explain differences in efficiency in a single-stage sampling procedure. The sample consists of 231 hotels in Spain in the period 2008-2012. Empirical evidence shows that the average level of profit efficiency is 45.85% and that age, labour productivity and location are determinants of this efficiency. Policy implications for the improvement of less efficient hotels are noted.