On the Impossibility of Efficiency in Production
30 Pages Posted: 10 Feb 2013
Date Written: February 10, 2013
Abstract
In this paper we consider the possibility that a firm may use costly resources to improve its technical efficiency. Results from static analyses imply that technical efficiency is determined by the configuration of factor prices. A dynamic model of the firm is developed under the assumption that managerial skill contributes to technical efficiency. Dynamic analysis shows that the firm can never be technically efficient if it maximizes profits, the steady state is always inefficient, and it is locally stable.
Keywords: optimal inefficiency, firm behavior, technical inefficiency
JEL Classification: C11
Suggested Citation: Suggested Citation
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