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Some reflections on technical and allocative inefficiency modeling

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  • Subal C Kumbhakar

Abstract

This paper offers a concise overview of the existing literature on efficiency and productivity, focusing on stochastic frontier models. The emphasis is placed on technical inefficiency (TI), defined as the failure to produce the maximum output given inputs, and allocative inefficiency (AI), arising from non-optimal input utilization. The primary objective of this brief survey is to assist readers in grasping the fundamental concepts of modelling TI and AI within single and/or multiple output production technologies. Additionally, attention is given to the challenges associated with computing the cost of AI (CAI) in primal-based models, as well as modelling CAI within dual cost and profit functions.

Suggested Citation

  • Subal C Kumbhakar, 2025. "Some reflections on technical and allocative inefficiency modeling," Tourism Economics, , vol. 31(1), pages 40-52, February.
    • Handle: RePEc:sae:toueco:v:31:y:2025:i:1:p:40-52
    DOI: 10.1177/13548166241248015
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    References listed on IDEAS

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    1. Subal C. Kumbhakar & Mike G. Tsionas, 2021. "Estimation of costs of technical and allocative inefficiency," Journal of Productivity Analysis, Springer, vol. 55(1), pages 41-46, February.
    2. Subal Kumbhakar & M. Denny & M. Fuss, 2000. "Estimation and decomposition of productivity change when production is not efficient: a paneldata approach," Econometric Reviews, Taylor & Francis Journals, vol. 19(4), pages 312-320.
    3. Mike G. Tsionas & Subal C. Kumbhakar, 2023. "Productivity and Performance: A GMM approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 331-344, April.
    4. Kumbhakar, Subal C. & Wang, Hung-Jen, 2006. "Estimation of technical and allocative inefficiency: A primal system approach," Journal of Econometrics, Elsevier, vol. 134(2), pages 419-440, October.
    5. Efthymios G. Tsionas & Subal C. Kumbhakar & Emir Malikov, 2015. "Estimation of Input Distance Functions: A System Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(5), pages 1478-1493.
    6. Schmidt, Peter & Knox Lovell, C. A., 1979. "Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers," Journal of Econometrics, Elsevier, vol. 9(3), pages 343-366, February.
    7. Subal C. Kumbhakar & Efthymios G. Tsionas, 2008. "Estimation of input‐oriented technical efficiency using a nonhomogeneous stochastic production frontier model," Agricultural Economics, International Association of Agricultural Economists, vol. 38(1), pages 99-108, January.
    8. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
    9. Mike G. Tsionas & Subal C. Kumbhakar, 2023. "Proxy variable estimation of productivity and efficiency," Southern Economic Journal, John Wiley & Sons, vol. 89(3), pages 885-923, January.
    10. Lai, Hung-pin & Kumbhakar, Subal C., 2019. "Technical and allocative efficiency in a panel stochastic production frontier system model," European Journal of Operational Research, Elsevier, vol. 278(1), pages 255-265.
    11. Kumbhakar, Subal C., 1987. "The specification of technical and allocative inefficiency in stochastic production and profit frontiers," Journal of Econometrics, Elsevier, vol. 34(3), pages 335-348, March.
    12. Kumbhakar,Subal C. & Wang,Hung-Jen & Horncastle,Alan P., 2015. "A Practitioner's Guide to Stochastic Frontier Analysis Using Stata," Cambridge Books, Cambridge University Press, number 9781107029514.
    13. G. Karagiannis & S. C. Kumbhakar & E. G. Tsionas, 2004. "A Distance Function Approach for Estimating Technical and Allocative Inefficiency," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 39(1), pages 19-30, January.
    14. Subal C. Kumbhakar, 2001. "Estimation of Profit Functions When Profit Is Not Maximum," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 1-19.
    15. Timo Sipiläinen & Subal C. Kumbhakar & Gudbrand Lien, 2014. "Performance of dairy farms in Finland and Norway from 1991 to 2008," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 41(1), pages 63-86, February.
    16. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    17. Kumbhakar, Subal C. & Wang, Hung-Jen, 2006. "Pitfalls in the estimation of a cost function that ignores allocative inefficiency: A Monte Carlo analysis," Journal of Econometrics, Elsevier, vol. 134(2), pages 317-340, October.
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