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Stochastic Estimation of Firm Inefficiency Using Distance Functions

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  • Scott E. Atkinson
  • Rolf Färe
  • Daniel Primont

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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  • Scott E. Atkinson & Rolf Färe & Daniel Primont, 2003. "Stochastic Estimation of Firm Inefficiency Using Distance Functions," Southern Economic Journal, John Wiley & Sons, vol. 69(3), pages 596-611, January.
    • Handle: RePEc:wly:soecon:v:69:y:2003:i:3:p:596-611
    DOI: 10.1002/j.2325-8012.2003.tb00515.x
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