Feasible estimation of firm-specific allocative inefficiency through Bayesian numerical methods

Scott E. Atkinson and Jeffrey H. Dorfman
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Scott E. Atkinson: Department of Economics, University of Georgia, Athens, GA, USA, Postal: Department of Economics, University of Georgia, Athens, GA, USA
Jeffrey H. Dorfman: Department of Agricultural and Applied Economics, University of Georgia, Athens, GA, USA, Postal: Department of Agricultural and Applied Economics, University of Georgia, Athens, GA, USA

Journal of Applied Econometrics, 2009, vol. 24, issue 4, pages 675-697

Abstract: Both the theoretical and empirical literature on the estimation of allocative and technical inefficiency has grown enormously. To minimize aggregation bias, ideally one should estimate firm and input-specific parameters describing allocative inefficiency. However, identifying these parameters has often proven difficult. For a panel of Chilean hydroelectric power plants, we obtain a full set of such parameters using Gibbs sampling, which draws sequentially from conditional generalized method of moments (GMM) estimates obtained via instrumental variables estimation. We find an economically significant range of firm-specific efficiency estimates with differing degrees of precision. The standard GMM approach estimates virtually no allocative inefficiency for industry-wide parameters. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2009
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