Economic inefficiency in a revenue setting: the Norwegian whitefish fishery

The main focus in the inefficiency literature is on suboptimal input use and how this causes increased costs, due to technical and allocative inefficiency. Production or cost functions are then typically used to describe the underlying technology of the firm. The possible revenue loss, due to lower than maximum production levels and suboptimal output mix, has received substantially less attention. By using a revenue function to measure inefficiency, the focus, model and estimation technique presented in this article differ from those of previous studies. A shadow revenue model is used to decompose revenue inefficiency into its technical and allocative components, in which the allocative inefficiency is due to a suboptimal output mix. The approach is illustrated using panel data of Norwegian whitefish trawlers. The results reveal large inefficiencies, with respect to output levels as well as output mix, indicating that this can be an important part of the picture when investigating economic inefficiency. To identify the determinants of revenue inefficiency, we conduct a second-step regression, in which technical and allocative inefficiency is regressed upon a set of explanatory variables. The inefficiencies are partly explained by the management system and fleet structure.