On the Estimation of Technical and Allocative Inefficiency Using Stochastic Frontier Functions: The Case of U.S. Class 1 Railroads.

In this paper, the author considers specification and estimation of technical and allocative inefficiency in a cost-minimizing framework using panel data. Some distinguishing features of the model are (1) the functional form of the production technology is flexible enough to allow elasticity to vary across firms; (2) allocative inefficiency, coming from managerial errors ou t of inertia , ignorance, etc., are separated from random errors in optimization; (3) the panel nature of the data allows the estimation of input and firm specific allocative inefficiency together with technical inefficiency; and (4) subdivision of the sample period allows one to make efficiency comparisons of each firm over the subperiods and to check the stability of the parameter estimates. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.