Statistical Estimation of Technical and Allocative Inefficiency
Using DEA
Rajiv D. Banker*, Hsihui Chang* and Ram Natarajan**
*University of California, Riverside, **University of Texas at Dallas
Abstract
We present a new method to estimating technical and allocative inefficiency using
Data Envelopment Analysis (DEA).
We show that the DEA technical inefficiency
measure using total revenues as the single output variable equals the aggregate technical
and allocative inefficiency. We employ this result to estimate allocative inefficiency and
construct statistical tests of the null hypothesis of no allocative inefficiency analogous to
those of the null hypothesis of no scale inefficiency. We illustrate our method using
revenue and personnel data for the top U.S. public accounting firms over 1995-98. Our
empirical results indicate the existence of statistically significant allocative inefficiency
in the public accounting industry.
Key words: Data envelopment analysis, Technical inefficiency, Allocative inefficiency,
Public accounting
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