Abstract
We construct a network performance measure for producers that use inputs to produce an intermediate output in a first stage of production and then use the intermediate output to produce final outputs in a second stage of production. Producers face a budget constraint and choose inputs, given input prices. Although various input combinations will be affordable, a smaller set of input combinations will be optimal in maximizing final outputs. We compare final outputs for firms that take inputs as given with final outputs when firms can optimally reallocate inputs given the fixed budget. This comparison allows measurement of the lost final output caused by a misallocation of resources in the first stage of production. We apply our method to study the performance of Japanese credit cooperatives during 2004 to 2007.
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