The Measurement and Decomposition of Cost-Inefficiency: The Translog Cost System.

Using a flexible translog cost function, this paper introduces an error specification to incorporate costs of technical and allocative inefficiencies. First, the maximum likelihood method is developed to obtain consistent parameter estimates of the cost function. These estimates are then used to measure costs of technical and allocative inefficiencies. The proposed methodology is illustrated using ten U.S. airlines observed over 1970-84. Copyright 1991 by Royal Economic Society.