WEAK AXIOM OF COST DOMINANCE - A NONPARAMETRIC TEST OF COST EFFICIENCY WITHOUT INPUT QUANTITY DATA

Varian's Weak Axiom of Cost Minimization provides a nonparametric test of cost minimization, which can be applied only when both input price and quantity data are available for individual firms. In this paper w e propose a Weak Axiom of Cost Dominance (WACD), which serves as the b asis of an alternative test of cost-minimization applicable in situati ons where input quantity data are missing. Unlike a previous test deve loped by Diewert and Parkan, the proposed test does identify individua l firms that violate the assumption of cost-minimizing behavior. It al so provides an upper bound of the cost-efficiency of any observed firm . The test procedure is shown to be equivalent to applying dominance a nalysis using normalized input prices with reference to the Cost-indir ect technology. The proposed method is applied to Nerlove's electrical utility data, The nonparametric results are also compared with parame tric efficiency levels computed from a stochastic frontier cost functi on.