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Measuring Technical, Allocative inefficiency, and Cost Inefficiency by Applying Duality Theory

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  • Tung Liu

    (Department of Economics, Ball State University)

Abstract

Total cost inefficiency comprises technical inefficiency and allocative inefficiency. Differentiating between the two components of total cost inefficiency has been challenging both theoretically and empirically. Current literature has solved this problem for specific cases, but not in general. Using the duality of production and cost functions, this paper proposes a new approach to solve this problem for general cases. Firstly, we define two types of allocative inefficiency and their input cost share inequalities. Secondly, a three-stage procedure is developed to estimate total cost inefficiency and its two components. Finally, an empirical presentation based on the existing data supplements the theory.

Suggested Citation

  • Tung Liu, 2020. "Measuring Technical, Allocative inefficiency, and Cost Inefficiency by Applying Duality Theory," Working Papers 202001, Ball State University, Department of Economics, revised Jun 2020.
    • Handle: RePEc:bsu:wpaper:202001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cost inefficiency; Technical inefficiency; Allocative inefficiency; Duality theory;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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