Causality between Technical and Allocative Efficiencies: An Empirical Testing

In production economics, one of the most interesting questions is that of the causal relationship between technical efficiency and allocative efficiency. This as yet remains a puzzle without a unique answer. There are a few theoretical analyses conceptualizing the relationship, but consensus has not yet been reached, and empirical tests are rare. Presents the empirical results of applying Granger’s (1969) and Sims’ (1972) causality tests using time series data on technical and allocative efficiencies of random samples of Indian farmers. These causality tests, with respect to technical and allocative effciences show that there is unidirectional causality from technical efficiency to allocative efficiency, and that the causative process is not bidirectional.