Abstract
The traditional approach to measuring allocative efficiency exploits input prices, which are rarely known at the firm level. This paper proves allocative efficiency can be measured as a profit-oriented distance to the frontier in a profit-technical efficiency space. This new approach does not require information on input prices. To validate the new approach, we perform a Monte-Carlo experiment providing evidence that the estimates of allocative efficiency employing the new and the traditional approach are highly correlated. Finally, as an illustration, we apply the new approach to a sample of about 900 enterprises from the chemical manufacturing industry in Germany.
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