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Exact Allocative and Technical Inefficiency Using the Normalized Quadratic Cost System

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  • Juan José Díaz-Hernández
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    Abstract

    In this paper we have built a theoretical model using a normalized quadratic cost system to obtain expressions for actual input demand and cost as functions of three components: frontier, allocative and technical inefficiency. We have used the shadow prices approach in the line of exact decomposition that allows us to solve Greene’s problem. Using the normalized quadratic cost system has permited to isolate not only allocative inefficiency but also the technical one, as simple functions of both parameters and variables. The model allows us to obtain individual and time varying technical and allocative inefficency measures when a panel data is available. This model has been applied to cargo handling in Spanish ports.

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    Paper provided by FEDEA in its series Studies on the Spanish Economy with number 210.

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    Handle: RePEc:fda:fdaeee:210

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    1. Atkinson, Scott E & Halvorsen, Robert, 1984. "Parametric Efficiency Tests, Economies of Scale, and Input Demand in U.S. Electric Power Generation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(3), pages 647-62, October.
    2. OW Maietta, 2000. "The decomposition of cost inefficiency into technical and allocative components with panel data of Italian dairy farms," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 27(4), pages 473-495, December.
    3. Atkinson, Scott E & Cornwell, Christopher, 1994. "Parametric Estimation of Technical and Allocative Inefficiency with Panel Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 231-43, February.
    4. Kumbhakar, Subal C. & Tsionas, Efthymios G., 2005. "Measuring technical and allocative inefficiency in the translog cost system: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 126(2), pages 355-384, June.
    5. Atkinson, Scott E & Cornwell, Christopher, 1994. "Estimation of Output and Input Technical Efficiency Using a Flexible Form and Panel Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 245-55, February.
    6. Kumbhakar, Subal C., 1997. "Modeling allocative inefficiency in a translog cost function and cost share equations: An exact relationship," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 351-356.
    7. Bauer, Paul W., 1990. "Recent developments in the econometric estimation of frontiers," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 39-56.
    8. Atkinson, Scott E. & Halvorsen, Robert, 1990. "Tests of allocative efficiency in regulated multi-product firms," Resources and Energy, Elsevier, vol. 12(1), pages 65-77, April.
    9. Greene, William H., 1980. "On the estimation of a flexible frontier production model," Journal of Econometrics, Elsevier, vol. 13(1), pages 101-115, May.
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