Technical and Allocative Inefficiency in Production

Production systems that account for technical and allocative inefficiencies offer a natural way to model dependence using vine copulas. We construct such vine copulas using a recently proposed family of bivariate copulas that permit dependence between the magnitude (but not the sign) of the allocative inefficiency and the magnitude of the technical inefficiency. We show how to estimate such models and argue that they better reflect dependencies that arise in practice. Such models also allow for significant improvements in precision of inefficiency estimation.

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