This paper uses panel data to estimate a two-tiered instead of a one-tiered frontier model. The innovation is to develop a two-step maximum likelihood procedure yielding consistent estimates of inefficiency, while at the same time accounting for heterogeneity. The model is applied by estimating a ‘two-tiered’ earnings function to obtain indices of worker and firm incomplete labour market wage information using panel data from the Panel Study of Income Dynamics (1969–84). The estimation preserves the traditional quadratic age-earnings profile, but measures the extent to which employers often pay more than necessary to hire a worker (incomplete employer information), while at the same time, employees often accept wages less than they could otherwise command (incomplete employee information). The results indicate that employees acquire less information than employers.
