Determinants of allocative and technical inefficiency in stochastic frontier models: An analysis of Norwegian electricity distribution firms |
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| Authors: | Andrew Musau Subal C Kumbhakar Ørjan Mydland Gudbrand Lien |
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| Institution: | 1. Department of Economics, State University of New York, Binghamton, NY13902-6000, USA;2. Inland School of Business and Social Sciences, Inland Norway University of Applied Sciences, Pb 952, NO-2604, Lillehammer, Norway;1. Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00 Prague, Czechia;2. Credit Benchmark, London, UK;1. Lancaster University Management School, LA1 4YX, UK;2. Department of Accounting and Finance, University of Sussex Business School, Falmer BN1 9SL, UK;1. Centre for Economics and Governance, Amrita University, India;2. Centre for Social Research and Methods & Research School of Economics, Australian National University, Australia |
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| Abstract: | Recent econometric advances have made it possible to distinguish between persistent and transient technical inefficiency along with allocative inefficiency in stochastic frontier models for panel data. Kumbhakar et al. (2020) and Lai and Kumbhakar (2019) introduce a methodology that allows for the estimation of these inefficiency components and costs therefrom, while including determinants of both components of technical inefficiency. We extend these models to include technical change and determinants of allocative inefficiency (input misallocation). Including a set of variables that influence input misallocation, we are able to determine the effects of these variables on the cost of allocative inefficiency. We provide empirical evidence on the costs of all three types of inefficiency using data on 149 Norwegian electricity distribution firms between 2000 and 2016. We find that the cost of input misallocation is only slightly lower than that of technical inefficiency. Our results reject a commonly imposed modeling assumption that firms are fully allocatively efficient. |
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