Exact Allocative and Technical Inefficiency Using the Normalized Quadratic Cost System
FEDEA Working Paper No. EEE 210
30 Pages Posted: 13 Apr 2006
Date Written: June 2005
In this paper we have built a theoretical model using a normalized quadratic cost system to obtain expressions for actual input demand and cost as functions of three components: frontier, allocative and technical inefficiency. We have used the shadow prices approach in the line of exact decomposition that allows to solve Greene's problem. Using the normalized quadratic cost system has permited to isolate not only allocative inefficiency but also the technical one, as simple functions of both parameters and variables. The model allows to obtain individual and time varying technical and allocative inefficency measures when a panel data is available. This model has been applied to cargo handling in Spanish ports.
Keywords: Normalized Quadratic Cost System, Allocative Inefficiency, Technical Inefficiency, the Greene problem, Exact Decomposition, Ports
JEL Classification: D21, C33, L92
Suggested Citation: Suggested Citation