Technical and allocative efficiency measurement using the distance function: The case of European banks

This paper extends the input distance function methodology to decompose cost inefficiency into technical and allocative inefficiency. We use a parametric stochastic frontier approach. This methodology was applied to a sample of European banks. It is shown that allocative inefficiency increases costs by about 25 %, as much as technical inefficiency. We also find a negative correlation between technical and allocative inefficiency.