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A Simple Statistical Test of Violation of the Weak Axiom of Cost Minimization

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  • Subhash C. Ray

    (University of Connecticut, Storrs CT 06269-1063 USA.)

Abstract

A problem with a practical application of Varian's Weak Axiom of Cost Minimization is that an observed violation may be due to random variation in the output quantities produced by firms rather than due to inefficiency on the part of the firm. In this paper, unlike in Varian (1985), the output rather than the input quantities are treated as random and an alternative statistical test of the violation of WACM is proposed. We assume that there is no technical inefficiency and provide a test of the hypothesis that an observed violation of WACM is merely due to random variations in the output levels of the firms being compared. We suggest an intuitive approach for specifying a value of the variance of the noise term that is needed for the test. The paper includes an illustrative example utilizing a data set relating to a number of U.S. airlines.

Suggested Citation

  • Subhash C. Ray, 2004. "A Simple Statistical Test of Violation of the Weak Axiom of Cost Minimization," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 39(1), pages 111-121, January.
    • Handle: RePEc:dse:indecr:v:39:y:2004:i:1:p:111-121
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    References listed on IDEAS

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    1. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-598, October.
    2. Ray,Subhash C., 2012. "Data Envelopment Analysis," Cambridge Books, Cambridge University Press, number 9781107405264.
    3. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-597, May.
    4. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
    5. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    6. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
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    Cited by:

    1. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, December.
    2. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.

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    More about this item

    Keywords

    Non Parametric Analysis; Data Envelopment Analysis (DEA); Free Disposal Hull (FDH) Z-test;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

    Statistics

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