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Allocative efficiency measurement revisited--Do we really need input prices?

  • Badunenko, Oleg
  • Fritsch, Michael
  • Stephan, Andreas

The traditional approach to measuring allocative efficiency exploits input prices, which are rarely known at the firm level. This paper proves allocative efficiency can be measured as a profit-oriented distance to the frontier in a profit-technical efficiency space. This new approach does not require information on input prices. To validate the new approach, we perform a Monte-Carlo experiment providing evidence that the estimates of allocative efficiency employing the new and the traditional approach are highly correlated. Finally, as an illustration, we apply the new approach to a sample of about 900 enterprises from the chemical manufacturing industry in Germany.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 5 (September)
Pages: 1093-1109

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:1093-1109
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