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Profit versus Cost Frontier Estimation of Price and Technical Inefficiency: A Parametric Approach with Panel Data

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  • Scott E. Atkinson
  • Christopher Cornwell

Abstract

We develop two panel data models, based on the assumption of shadow‐profit maximization, to obtain firm‐specific parametric estimates of allocative, scale, and technical inefficiency. One is a restricted shadow‐profit system with additional equations for quasi‐fixed inputs that allow testing for the efficiency of their utilization. The other is a shadow‐cost system augmented with an equation to capture deviations from marginal‐cost pricing. We show that with the translog functional form, the shadow‐profit system may encounter computational difficulties that the shadow‐cost system avoids. An application of the shadow‐cost system to the U.S. airline industry is provided.

Suggested Citation

  • Scott E. Atkinson & Christopher Cornwell, 1998. "Profit versus Cost Frontier Estimation of Price and Technical Inefficiency: A Parametric Approach with Panel Data," Southern Economic Journal, John Wiley & Sons, vol. 64(3), pages 753-764, January.
    • Handle: RePEc:wly:soecon:v:64:y:1998:i:3:p:753-764
    DOI: 10.1002/j.2325-8012.1998.tb00092.x
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    References listed on IDEAS

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    1. Atkinson, Scott E & Cornwell, Christopher, 1994. "Parametric Estimation of Technical and Allocative Inefficiency with Panel Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 231-243, February.
    2. Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 151-181.
    3. Sickles, Robin C. & Good, David & Johnson, Richard L., 1986. "Allocative distortions and the regulatory transition of the U.S. airline industry," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 143-163.
    4. Lau, Lawrence J & Yotopoulos, Pan A, 1971. "A Test for Relative Efficiency and Application to Indian Agriculture," American Economic Review, American Economic Association, vol. 61(1), pages 94-109, March.
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