Some reflections on technical and allocative inefficiency modeling

Abstract

This paper offers a concise overview of the existing literature on efficiency and productivity, focusing on stochastic frontier models. The emphasis is placed on technical inefficiency (TI), defined as the failure to produce the maximum output given inputs, and allocative inefficiency (AI), arising from non-optimal input utilization. The primary objective of this brief survey is to assist readers in grasping the fundamental concepts of modelling TI and AI within single and/or multiple output production technologies. Additionally, attention is given to the challenges associated with computing the cost of AI (CAI) in primal-based models, as well as modelling CAI within dual cost and profit functions.