Reallocation costs, reference-dependent profit function and inefficiency

The objective of this paper is to propose a theoretical framework where firms are maximizing profit taking into account a reallocation cost. This we do by introducing a reference-dependent profit function. It is shown in this paper that such a reference-dependent profit function is a useful concept to partly explain the existence of inefficiency for firms. Along this line it is shown that one can construct a suitable dynamical process quantifying the catching up of firms to reach the production frontier at each time period.