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Determinants of allocative and technical inefficiency in stochastic frontier models: An analysis of Norwegian electricity distribution firms

Andrew Musau (), Subal Kumbhakar (), Ørjan Mydland and Gudbrand Lien

European Journal of Operational Research, 2021, vol. 288, issue 3, 983-991

Abstract: Recent econometric advances have made it possible to distinguish between persistent and transient technical inefficiency along with allocative inefficiency in stochastic frontier models for panel data. Kumbhakar et al. (2020) and Lai and Kumbhakar (2019) introduce a methodology that allows for the estimation of these inefficiency components and costs therefrom, while including determinants of both components of technical inefficiency. We extend these models to include technical change and determinants of allocative inefficiency (input misallocation). Including a set of variables that influence input misallocation, we are able to determine the effects of these variables on the cost of allocative inefficiency. We provide empirical evidence on the costs of all three types of inefficiency using data on 149 Norwegian electricity distribution firms between 2000 and 2016. We find that the cost of input misallocation is only slightly lower than that of technical inefficiency. Our results reject a commonly imposed modeling assumption that firms are fully allocatively efficient.

Keywords: Input misallocation; Technical inefficiency; Determinants of inefficiency; Norwegian electricity distribution firms (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.ejor.2020.06.023

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