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The Dynamics of Efficiency Improving Input Allocation and Reorganization Costs

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  • Spiro, Stefanou
  • Choi, Onelack
  • Stokes, Jeffrey

Abstract

The theory of production addresses rational producers seeking to minimize production costs given their target outputs. Achieving allocative efficiency requires input reallocation and neoclassical theory assumes there are no transition costs associated with this reallocation. This paper relaxes the assumption that decision-making units have the ability to reorganize their activities instantaneously and costlessly to arrive at an efficient input allocation. A dynamic cost minimization problem is presented to identify the dynamics of input transitions. The theory of gradual transition toward efficient input allocation which we develop is applied to agricultural banking institutions in the United States (US).

Suggested Citation

  • Spiro, Stefanou & Choi, Onelack & Stokes, Jeffrey, 2002. "The Dynamics of Efficiency Improving Input Allocation and Reorganization Costs," Efficiency Series Papers 2002/07, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    • Handle: RePEc:oeg:wpaper:2002/07
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    References listed on IDEAS

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    1. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
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    3. Bogetoft, Peter & Fare, Rolf & Obel, Borge, 2006. "Allocative efficiency of technically inefficient production units," European Journal of Operational Research, Elsevier, vol. 168(2), pages 450-462, January.
    4. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    5. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200.
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