Impacts of Price Fluctuation on Resource Allocation Efficiency
Ekonomska Istrazivanja-Economic Research
This paper develops a dynamic model to analyze the e¤ ects of di¤ erent levels of price ‡uctuations on resource allocation e¢ ciency. The model shows two di¤ erent strategies that enterprises adopt when they confront di¤ erent levels of price ‡uctuations. In respond to small ‡uctuations, enterprises might adopt a conservative strategy of maintaining the ratio of factor inputs and leaving production plans unchanged of the adjustment cost. As a result, allocation ine¢ ciency is unavoidable.
... unavoidable. However, greater ‡uctuations which increase the opportunity cost of a conservative strategy induce enterprises to accept an adjustment strategy; they must change the ratio of factor inputs and the production plans passively. This transformation indicates that a threshold e¤ ect exists in the price ‡uctuations' in ‡uence on resource allocation ine¢ ciency. Using stochastic frontier analysis (SFA) and China's provincial panel data of 1978 to 2007, this paper con...rms that price ‡uctuation has a nonlinear e¤ ect on allocation e¢ ciency loss, and concludes that traditional analyses underestimate the adverse impacts of price ‡uctuation on China's economy.