IDEAS home Printed from
   My bibliography  Save this article

A Consistent Approach to Cost Efficiency Measurement


  • George C. Bitros
  • Efthymios G. Tsionas


Consistent specifications of the allocative inefficiency function in 'cost plus input share equations' systems may be difficult, if not impossible, to find because most plausible ones violate certain reasonable "a priori" conditions. Moreover, the models to which they lead give rise to highly non-linear likelihood functions that are very hard to estimate. In an effort to confront these difficulties, this paper adapts an idea first suggested by Greene (1993) that allocative inefficiency ought to be related to input prices and allocative distortions in the input share equations. The system of 'cost plus input demand equations' that emerges is estimated by standard seemingly unrelated regression (SUR) techniques using data from private and state firms that operated in Greek manufacturing during the 1979-88 period. Among other findings, the estimates show that overall inefficiency for private and state firms was 63.5% and 102.2%, respectively in comparison with the least inefficient firms in their class. In relative terms these figures imply that state firms were almost 61% less efficient than private firms were. Technical and allocative reasons amounting to 64% and 36%, respectively, accounted for this excess inefficiency of state firms, in addition to differences in the utilization of labour, capital and debt. Lastly, it is found that the magnitudes of technical and allocative inefficiencies depend critically upon a self-consistent specification of the allocative inefficiency function. Copyright 2004 Blackwell Publishing Ltd.

Suggested Citation

  • George C. Bitros & Efthymios G. Tsionas, 2004. "A Consistent Approach to Cost Efficiency Measurement," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 49-69, February.
  • Handle: RePEc:bla:obuest:v:66:y:2004:i:1:p:49-69

    Download full text from publisher

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Johannes Sauer & Klaus Frohberg & Henrich Hockmann, 2006. "Stochastic efficiency measurement: The curse of theoretical consistency," Journal of Applied Economics, Universidad del CEMA, vol. 9, pages 139-166, May.
    2. Vergés, Joaquim, 2014. "Evaluación de la eficiencia comparativa de empresas y entidades productivas: Indicadores y técnicas de análisis
      [Evaluating comparative efficiency of companies and productive entities: Measures and
      ," MPRA Paper 58329, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:obuest:v:66:y:2004:i:1:p:49-69. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.