Economic performance of US Class 1 railroads: A stochastic frontier approach

In this paper we estimate technical and allocative inefficiency and cost thereof of 13 US Class 1 railroads using stochastic frontier production methodology in a panel data framework. In addition to passenger and freight services, we included quality of these services in our analysis. Empirical results show that the cost of technical inefficiency varies quite substantially among the roads. The most inefficient road is 29.91 % above the cost frontier while technical inefficiency on an average increased cost by 16-23%. On the contrary, allocative inefficiency does not differ much among the roads. Increase in cost due to allocative inefficiency is in between 4% and 9% with a mean of around 7%. Thus while the roads are quite competitive and efficient in allocating their inputs, there is substantial scope for some of them to improve their technical efficiency.