Input price variation across locations and a generalized measure of cost efficiency

Abstract

We propose a non-parametric model for global cost minimization as a framework for optimal allocation of a firm's output target across multiple locations, taking account of differences in input prices and technologies across locations. This should be useful for firms planning production sites within a country and for foreign direct investment decisions by multi-national firms. Two illustrative examples are included. The first example considers the production location decision of a manufacturing firm across a number of adjacent states within the US. In the other example, we consider the optimal allocation of US and Canadian automobile manufacturers across the two countries.