Exact Allocative and Technical Inefficiency Using the Normalized Quadratic Cost System

Juan José Díaz-Hernández

No 210, Studies on the Spanish Economy from FEDEA

Abstract: In this paper we have built a theoretical model using a normalized quadratic cost system to obtain expressions for actual input demand and cost as functions of three components: frontier, allocative and technical inefficiency. We have used the shadow prices approach in the line of exact decomposition that allows us to solve Greeneís problem. Using the normalized quadratic cost system has permited to isolate not only allocative inefficiency but also the technical one, as simple functions of both parameters and variables. The model allows us to obtain individual and time varying technical and allocative inefficency measures when a panel data is available. This model has been applied to cargo handling in Spanish ports.

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