Estimating a Non-Minimum Cost Function for Hospitals: Comment; Reply

Eakin and Kniesner (1988) estimated a non-minimum cost function that is derived from a shadow cost function in which shadow and market prices for inputs are allowed to diverge. While the basic approach is sound, Eakin and Kniesner made an error in the derivation that causes the equations for observe...

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Bibliographic Details
Published inSouthern economic journal Vol. 58; no. 4; p. 1114
Main Authors Atkinson, Scott E, Halvorsen, Robert, Eakin, B Kelly, Kniesner, Thomas J
Format Journal Article
LanguageEnglish
Published Stillwater Southern Economic Association 01.04.1992
Subjects
Cost estimates
Critiques
Econometrics
Economic models
Economic statistics
Economic theory
Economics
Errors
Hospital costs
Hospitals
Input output analysis
Prices
Shadow prices
Studies
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Summary:Eakin and Kniesner (1988) estimated a non-minimum cost function that is derived from a shadow cost function in which shadow and market prices for inputs are allowed to diverge. While the basic approach is sound, Eakin and Kniesner made an error in the derivation that causes the equations for observed total cost and cost shares to violate necessary homogeneity conditions, and therefore their econometric model is seriously misspecified. They also make several incorrect statements about the interpretation of the shadow prices. The conclusions concerning the efficiency of input use that can be drawn directly from the estimated shadow prices are limited to statements about the relative quantities of inputs. Eakin and Kniesner reply that there were typographical errors in 4 equations in the theoretical section of their analysis. They clarify 2 points that should rectify confusion over the roles of absolute versus relative input prices in the non-minimum cost function. They also refine the concept of conditional efficient employment of an input.
ISSN:0038-4038
2325-8012