Allocative Distortions, Technical Progress, and Input Demand in U.S. Airlines: 1970-1984.

This paper generalizes a globally concave and flexible cost function to accommodate allocative distortions. These distortions are introduced through shadow prices and are specified as functions of regressors that make distortion factors firm, input, and time specific. The estimated model, based on a panel of nineteen U.S. airlines observed during 1970-84, rejects the hypothesis of no allocative distortions. Increase in costs due to allocative distortions are calculated for each airline over the entire period. The rate of technical progress and economies of scale are also estimated based on models with and without allocative distortions. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.