Efficiency measurement with multiple outputs and multiple inputs |
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Authors: | Subal C Kumbhakar |
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Institution: | (1) Department of Economics, University of Texas at Austin, 78712-1173 Austin, Texas |
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Abstract: | This paper discusses modeling technical and allocative inefficiencies in both cost minimizing and profit maximizing frameworks with special emphasis on multiple inputs and multiple outputs. Both primal and dual models are considered for this purpose. In the primal approach we use a separable output and input function (the constant elasticity of transformation output function and Cobb-Douglas input function). The dual models assume translog cost or profit functions. Technical inefficiency is assumed to be random in the cross-sectional models, and fixed firm-specific parameter in the panel data models. Allocative inefficiencies are always treated as input-specific parameters. We derive exact relations linking technical inefficiency and allocative inefficiencies to cost and profit when the underlying technology is represented by a flexible functional form such as the translog. It is shown that appending a one-sided homoscedastic error term to model technical inefficiency, or neglecting technical inefficiency altogether in a translog profit tunciton results in model misspecification and inconsistent parameter estimates. |
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Keywords: | Input and output technical inefficiencies primal and dual approaches cost minimization profit maximization cross-sectional and panel data |
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