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Stochastic Estimation of Firm Inefficiency Using Distance Functions

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  • Scott E. Atkinson

    ()
    (Department of Economics, University of Georgia)

  • Rolf Färe

    (Department of Economics, Oregon State University)

  • Daniel Primont

    (Department of Economics, Southern Illinois University)

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    Abstract

    Econometric estimation of allocative and technical efficiency has frequently been carried out using a shadow cost function and its associated share or demand equations. Since the problem is formulated in terms of shadow prices, the effect of allocative inefficiency on input usage must be computed indirectly from input share or demand equations. As an alternative approach, we derive and estimate an input shadow distance system comprising the dual shadow input distance function and the price equations derived from the shadow cost minimization problem. Estimated shadow quantities provide direct estimates of the effect of allocative inefficiency on input usage. One can also easily calculate firm- and time-varying technical inefficiency by decomposing the residuals. We also compute returns to scale and the cost savings obtained by eliminating both types of inefficiency. Our approach is illustrated using a panel of U.S. railroads.

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    Bibliographic Info

    Article provided by Southern Economic Association in its journal Southern Economic Journal.

    Volume (Year): 69 (2003)
    Issue (Month): 3 (January)
    Pages: 596-611

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    Handle: RePEc:sej:ancoec:v:69:3:y:2003:p:596-611

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    Cited by:
    1. Rolf Färe & Daniel Primont, 2012. "Dual allocative efficiency parameters," Journal of Productivity Analysis, Springer, vol. 37(3), pages 233-238, June.
    2. Tamini, Lota D. & Larue, Bruno, 2009. "Technical and Environmental efficiencies and Best Management Practices in Agriculture," MPRA Paper 18964, University Library of Munich, Germany.
    3. Chambers, Robert & Färe, Rolf & Grosskopf, Shawna & Vardanyan, Michael, 2013. "Generalized quadratic revenue functions," Journal of Econometrics, Elsevier, vol. 173(1), pages 11-21.
    4. Rolf Färe & Carlos Martins-Filho & Michael Vardanyan, 2010. "On functional form representation of multi-output production technologies," Journal of Productivity Analysis, Springer, vol. 33(2), pages 81-96, April.
    5. Sauer, Johannes & Walsh, John & Zilberman, David, 2012. "Producer Behaviour and Agri-Environmental Policies: A Directional Distance based Matching Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124877, Agricultural and Applied Economics Association.
    6. Sauer, Johannes & Walsh, John & Zilberman, David, 2013. "Agri-Environmental Policy Effects at Producer Level - Identification and Measurement," 53rd Annual Conference, Berlin, Germany, September 25-27, 2013 156099, German Association of Agricultural Economists (GEWISOLA).
    7. Sauer, Johannes & Walsh, John & Zilberman, David, 2012. "Behavioural Change through Agri-Environmental Policies ? – A Distance Function based Matching Approach," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134783, Agricultural Economics Society.
    8. Balcombe, Kelvin George & Doucouliagos, Hristos & Fraser, Iain, 2007. "Input usage, output mix and industry deregulation: an analysis of the Australian dairy manufacturing industry," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(2), June.
    9. Malgorzata Sulimierska, 2014. "Total factor productivity estimation for Polish manufacturing industry: A comparison of alternative methods," Working Paper Series 6714, Department of Economics, University of Sussex.
    10. Sauer, Johannes & Latacz-Lohmann, Uwe, 2012. "Efficient Innovation in Dairy Production - Empirical Findings for Germany," 52nd Annual Conference, Stuttgart, Germany, September 26-28, 2012 137386, German Association of Agricultural Economists (GEWISOLA).
    11. Marsh, Thomas L. & Featherstone, Allen M., 2003. "Inverse Demand Relationships For Wheat Food Use By Class," 2003 Annual meeting, July 27-30, Montreal, Canada 22001, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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