Non-maximizing output behavior for firms with a cost-constrained technology |
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Authors: | Jos L T Blank |
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Institution: | (1) Institute for Public Sector Efficiency Studies, Delft University of Technology, P.O. Box 5015, Delft, 2600, The Netherlands |
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Abstract: | In many public service industries, firms are constrained by a cost (budget) and characterized by non-maximizing output behavior,
due to bureaucratic behavior, for instance. This paper proposes a model based on the assumption that firms with a cost constraint
do not maximize service levels due to resource preferences. It derives the exact relationships between services delivered,
(shadow) input prices, cost constraints, and optimal input quantities. From these relationships, allocative efficiencies,
technical efficiencies, output ray elasticities, and marginal cost can easily be derived.
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Keywords: | Indirect output distance function Shadow cost Shadow prices Input preference Allocative efficiency |
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