Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers

Earlier papers by Aiger, Lovell and Schmidt and by Meeusen and van den Broeck have considered stochastic frontier production functions. this paper extends that work by considering the duality between stochastic frontier production and cost funstions, under the assumtions of exact cost minimization (tecchnical inefficiency only) and of inexact cost minimization (technical and allocative inefficiency). We show how to measure both types of inefficiency, and the associated cost of inefficiency. The techniques are illustrated using data on steam-electric generating plants.