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A Distance Function Approach for Estimating Technical and Allocative Inefficiency

  • G. Karagiannis

    (Department of International and European Economic & Political Studies, University of Macedonia, Thessaloniki 540 06, Greece)

  • S. C. Kumbhakar

    (Department of Economics, State University of New York, Binghamton, NY 13902, USA.)

  • E. G. Tsionas

    (Department of Economics, Athens University of Economics and Business, Athens, Greece.)

This paper presents a procedure for measuring technical and allocative inefficiency in an input distance function framework. The procedure involves solving a system of equations to compute the unobserved cost minimizing input vector that is used to compute the cost of allocative inefficiency. The system is non-linear but a rather simple linear approximation may also be used. Thus we show that the input distance function approach provides information not only on the extent of input over - (under-) utilization but also their impact on cost.

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Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 39 (2004)
Issue (Month): 1 (January)
Pages: 19-30

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Handle: RePEc:dse:indecr:v:39:y:2004:i:1:p:19-30
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