PARAMETRIC-ESTIMATION OF TECHNICAL AND ALLOCATIVE INEFFICIENCY WITH PANEL-DATA

The error-components approach to estimating allocative inefficiency im poses restrictive assumptions on the distributions of the errors and f unctional form. The parametric approach does not require special assum ptions about the error distribution or technology, but typically assum es technical efficiency or restrictive functional forms. The parametri c approach also allows for systematic firm responses to shadow prices. We generalize the parametric approach to a panel data setting and sho w that input and firm-specific allocative inefficiency, as well as fir m-specific technical inefficiency, can be identified and estimated usi ng a flexible functional form. This is demonstrated empirically with a n application to U.S. airlines.