ALLOCATIVE INEFFICIENCY AND ITS COST: THE CASE OF SPANISH PUBLIC HOSPITALS Ana Rodríguez-Álvarez (University of Oviedo, Spain) * Víctor Fernández-Blanco (University of Oviedo, Spain) C.A. Knox Lovell (University of Georgia, USA) ABSTRACT In this paper we present a new empirical model based on an input distance function, from which estimates of allocative inefficiency and its cost can be obtained. The model avoids the "Greene problem," which refers to the difficulty in practice of using a cost system to separate economic inefficiency into its technical and allocative components. We also develop a procedure to calculate the cost of allocative inefficiency. Using a panel of Spanish public hospitals to apply our methodology, we find evidence of systematic allocative inefficiency in the employment of variable inputs. Since inputs are generally poor substitutes, the cost of this allocative inefficiency is high. Keywords: allocative inefficiency cost, Spanish public hospitals, duality theory, Greene problem, parametric input distance function. JEL classification: C33, D24, D73, I12, L32 * Corresponding author: Departamento de Economía, Universidad de Oviedo, Campus del Cristo, 33071 Oviedo, SPAIN, e-mail: ana@correo.uniovi.es , Telephone: (+34) 985 10 48 84, Fax: (+34) 985 10 48 71