Abstract
This paper considers the decomposition of cost inefficiency into its technical and allocative components. First, the relevant literature is surveyed, showing that the shadow price approach has significant computational advantages over alternative procedures. To illustrate this approach, a shadow cost model is applied to a panel of dairy farms in Northern Italy, and cost inefficiency is decomposed into its technical and allocative components. The main results from this application are that the cost excess owing to inefficiency in the sample is on average 69 per cent, mainly as a result of technical inefficiency, and that allocative inefficiency relates to the under-utilisation of forage crops and of purchased feed with respect to hired labour.
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