Measuring Technical, Allocative inefficiency, and Cost Inefficiency by Applying Duality Theory

Tung Liu ()

No 202001, Working Papers from Ball State University, Department of Economics

Abstract: Total cost inefficiency comprises technical inefficiency and allocative inefficiency. Differentiating between the two components of total cost inefficiency has been challenging both theoretically and empirically. Current literature has solved this problem for specific cases, but not in general. Using the duality of production and cost functions, this paper proposes a new approach to solve this problem for general cases. Firstly, we define two types of allocative inefficiency and their input cost share inequalities. Secondly, a three-stage procedure is developed to estimate total cost inefficiency and its two components. Finally, an empirical presentation based on the existing data supplements the theory.

Keywords: Cost inefficiency; Technical inefficiency; Allocative inefficiency; Duality theory (search for similar items in EconPapers)
JEL-codes: D21 D22 D24 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-06, Revised 2020-06
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http://econfac.bsu.edu/research/workingpapers/bsuecwp202001liu.pdf First version, 2020 (application/pdf)

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