This study investigates functional equivalence between entering money into transaction costs that appears in firms' cost functions and the money in the production function. In light of this model, the purpose of the study is to show the impact of financial account management in general on productive efficiency.
A stochastic production frontier approach is applied to estimate production and technical efficiency model jointly to analyse the effect of alternative financial instruments on the productive efficiency of 12 EU countries.
The results suggest that the growth performance of these countries is partly explained by the changes in productive efficiency, and that the efficiency is not independent of financial account management.
The contribution of this study to the literature is two‐fold. First, it analyses the meaning of transaction costs in production and its consequences for productive inefficiency theoretically. Second, it tests the significance of financial account management as an instrument to deal with transaction costs in production.
