LAUSR

Abstract Total cost inefficiency comprises technical inefficiency and allocative inefficiency. Measuring cost inefficiency with these two components has been challenging both theoretically and empirically. Current literature has provided some solutions. However, these solutions are restricted to specific functions and their empirical estimations are complicated to implement, which lead to limited applications. Using the duality between production and cost functions, this paper proposes a new approach that is simple for estimation and applicable to general cases. Firstly, we define two types of allocative inefficiency and derive their input cost share inequalities. Secondly, a three-stage procedure is developed to estimate total cost inefficiency and its two components. Finally, an empirical presentation based on the existing data supplements the theory. Our results show that this solution can identify the inefficiency for each input and derive robust estimates of economies of scale, which are important for both policy implications and managerial decisions.