A Distance Function Approach for Estimating Technical and Allocative Inefficiency

This paper presents a procedure for measuring technical and allocative inefficiency in an input distance function framework. The procedure involves solving a system of equations to compute the unobserved cost minimizing input vector that is used to compute the cost of allocative inefficiency. The system is non-linear but a rather simple linear approximation may also be used. Thus we show that the input distance function approach provides information not only on the extent of input over - (under-) utilization but also their impact on cost.