The allocative efficiency measure by means of a distance function: The case of Spanish public railways

This paper is an empirical application of the distance function to study the allocative efficiency of a regulated railway Spanish firm, RENFE, where the cost minimising hypothesis may be questioned. Besides and in contrast with other studies, we include the possibility of the presence of persistent allocative inefficiency. To achieve these aims, we have estimated a system of equations for the inputs distance function and cost shares using annual data over the period 1955–95. Using this procedure we have checked the presence of persistent allocative inefficiency, in particular a systematic overutilisation of labour and underutilisation of capital. Moreover, we have found some empirical evidence that, since 1984, management contracts have improved the input allocation in Spanish railways.