An Econometric Look at Inefficiency Among US States, 1977-1986

U.S. states during the 1977-1986 business cycle are found to have small but significant technical inefficiency in the private sector. Inefficiency is influenced by several factors, including prior economic performance, location, Hicks labor augmenting technical progress in the manufacturing sector in an earlier 1970s period, college graduation, and income inequality. The existence of a monetary channel, urban agglomeration, and a high school diploma "sheepskin" effect for improved technical efficiency are rejected. Results from earlier studies using noneconometric methods to measure technical efficiency are independently confirmed, indicating that interstate technical inefficiency exists and can be measured using both parametric and nonparametric methods, but may overestimate how different states are from each other.