Measuring Technical, Allocative inefficiency, and Cost Inefficiency by Applying Duality Theory

Total cost inefficiency comprises technical inefficiency and allocative inefficiency. Differentiating between the two components of total cost inefficiency has been challenging both theoretically and empirically. Current literature has solved this problem for specific cases, but not in general. Using the duality of production and cost functions, this paper proposes a new approach to solve this problem for general cases. Firstly, we define two types of allocative inefficiency and their input cost share inequalities. Secondly, a three-stage procedure is developed to estimate total cost inefficiency and its two components. Finally, an empirical presentation based on the existing data supplements the theory.