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Cost constrained industry inefficiency

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  • Peyrache, Antonio

Abstract

In this paper a definition of industry inefficiency in cost constrained production environments is introduced. This definition uses the indirect directional distance function and quantifies the inefficiency of the industry in terms of the overall output loss, given the industry cost budget. The industry inefficiency indicator is then decomposed into sources components: reallocation inefficiency arising from sub-optimal configuration of the industry; firm inefficiency arising from a failure to select optimal input quantities (given the prevalent inputs prices); firm inefficiency due to lack of best practices. The method is illustrated using data on Ontario electricity distributors. These data show that lack of best practices is only a minor component of the overall inefficiency of the industry (less than 10 percent), with reallocation inefficiency accounting for more than 75 percent of the overall inefficiency of the system. An analysis based on counter-factual input prices is conducted in order to illustrate how the model can be used to estimate the effects of a change in the regulation regime.

Suggested Citation

  • Peyrache, Antonio, 2015. "Cost constrained industry inefficiency," European Journal of Operational Research, Elsevier, vol. 247(3), pages 996-1002.
  • Handle: RePEc:eee:ejores:v:247:y:2015:i:3:p:996-1002
    DOI: 10.1016/j.ejor.2015.06.067
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:ejores:v:276:y:2019:i:3:p:1170-1177 is not listed on IDEAS
    2. Hien Thu Pham & Antonio Peyrache, 2015. "Industry Inefficiency Measures: A Unifying Approximation Proposition," CEPA Working Papers Series WP102015, School of Economics, University of Queensland, Australia.
    3. Antonio Peyrache & Maria C. A. Silva, 2019. "The Inefficiency of Production Systems and its decomposition," CEPA Working Papers Series WP052019, School of Economics, University of Queensland, Australia.
    4. Valentin Zelenyuk, 2018. "Some Mathematical and Historical Clarifications on Aggregation in Efficiency and Productivity Analysis and Connection to Economic Theory," CEPA Working Papers Series WP032018, School of Economics, University of Queensland, Australia.
    5. Peyrache, Antonio & Zago, Angelo, 2016. "Large courts, small justice!," Omega, Elsevier, vol. 64(C), pages 42-56.

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