Productivity Growth and Efficiency under Leontief Technology: An Application to US Steam-Electric Power Generation Utilities

Abstract

A theoretical framework is developed for decomposing partial factor productivity and measuring technical inefficiency when the underlying technology is characterized by factor non-substitution. With Farrell's (1957) radial index of technical inefficiency being inappropriate in this case, Russell's (1985; 1987) non-radial indices are adapted to measure technical inefficiency in a Leontief model. A system of factor demand equations with a regime specific technical inefficiency term is proposed and estimated allowing for dependence across inputs using a copula approach. Then the paper presents a complete decomposition of partial factor productivity changes using a dataset of U.S. steam-power electric generation utilities.