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Allocative Efficiency Measurement Revisited: Do We Really Need Input Prices?

  • Oleg Badunenko
  • Michael Fritsch
  • Andreas Stephan

The traditional approach to measuring allocative efficiency is based on input prices, which are rarely known at the firm level. This paper proposes a new approach to measure allocative efficiency which is based on the output-oriented distance to the frontier in a profit - technical efficiency space - and which does not require information on input prices. To validate the new approach, we perform a Monte-Carlo experiment which provides evidence that the estimates of 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 industry in Germany.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 591.

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Length: 24 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp591
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