The Adjustment-cost Model of the Firm: Duality and Productive Efficiency

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Abstract

We present the theoretical foundation for an adjustment cost technology that supports the intertemporal production decision making behavior using the directional distance function. Dynamic input efficiency measures are developed that can separate out the impact of variable and dynamic factors inefficiency levels. An approach to implement this theory in a nonparametric fashion is developed and applied to an unbalanced panel of Dutch glasshouse firms. The application finds overuse of all variable inputs and overcapitalization of installations, the overall dynamic efficiency gain of 16% remains possible, with allocative inefficiencies indicating underinvestment in structures and installations. A comparison of static and dynamic efficiency measures finds that the static overall cost inefficiency is overestimated with technical inefficiency being overstated and allocative inefficiency being understated.
Original languageEnglish
Pages (from-to)245-256
JournalInternational Journal of Production Economics
Volume168
DOIs
Publication statusPublished - 2015

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