The Dynamics of Efficiency Improving Input Allocation and Reorganization Costs

Spiro Stefanou, Onelack Choi and Jeffrey Stokes

No 2002/07, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

Abstract: The theory of production addresses rational producers seeking to minimize production costs given their target outputs. Achieving allocative efficiency requires input reallocation and neoclassical theory assumes there are no transition costs associated with this reallocation. This paper relaxes the assumption that decision-making units have the ability to reorganize their activities instantaneously and costlessly to arrive at an efficient input allocation. A dynamic cost minimization problem is presented to identify the dynamics of input transitions. The theory of gradual transition toward efficient input allocation which we develop is applied to agricultural banking institutions in the United States (US).

Keywords: Allocative efficiency; dynamic cost minimization; agricultural banks (search for similar items in EconPapers)
Pages: 40
Date: 2002
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