Total factor productivity growth in Australian National Railways-An application of shadow prices

The usual formulation of total factor productivity (TFP) growth is generalised to a multi-output, multi-input production process. The general expression derived makes no assumption about the objective of the firm, nor about the relationship between prices and associated marginal values. It can therefore accommodate, in addition to various firm objectives, the introduction of shadow pricing into the measurement of productivity growth. The theory is applied to the case of the Australian National Railways Commission (AN Rail), where excess staff levels, and the delivery of certain ‘community service obligations’ provide examples of the application of shadow prices. Rates of TFP growth are calculated by applying both the traditional formulation and the more general one accommodating any divergence between actual and shadow prices. When shadow pricing is accounted for, the average compound rate of TFP growth in AN Rail falls by up to 37%.