Abstract
In this paper, we present a new empirical model based on an input distance function, from which estimates of allocative inefficiency and its cost can be obtained. The model avoids the “Greene problem,” which refers to the difficulty in practice of using a cost system to separate economic inefficiency into its technical and allocative components. We also develop a procedure to calculate the cost of allocative inefficiency. Using a panel of Spanish public hospitals to apply our methodology, we find evidence of systematic allocative inefficiency in the employment of variable inputs. Since inputs are generally poor substitutes, the cost of this allocative inefficiency is high.
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