Impacts of Price Fluctuation on Resource Allocation Efficiency

Congming Ding, Yanling Xi and Zhongchang Chen

Economic Research-Ekonomska Istraživanja, 2012, vol. 25, issue 3, 600-619

Abstract: This paper develops a dynamic model to analyze the effects of different levels of price fluctuations on resource allocation efficiency. The model shows two different strategies that enterprises adopt when they confront different levels of price fluctuations. In respond to small fluctuations, enterprises might adopt a conservative strategy of maintaining the ratio of factor inputs and leaving production plans unchanged of the adjustment cost. As a result, allocation inefficiency is unavoidable. However, greater fluctuations which increase the opportunity cost of a conservative strategy induce enterprises to accept an adjustment strategy; they must change the ratio of factor inputs and the production plans passively. This transformation indicates that a threshold effect exists in the price fluctuations’ influence on resource allocation inefficiency. Using stochastic frontier analysis (SFA) and China’s provincial panel data of 1978 to 2007, this paper confirms that price fluctuation has a nonlinear effect on allocation efficiency loss, and concludes that traditional analyses underestimate the adverse impacts of price fluctuation on China’s economy.

Date: 2012
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DOI: 10.1080/1331677X.2012.11517525

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