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Partially Convex Production Technology and Efficiency Measurement

Author

Listed:
  • Sung Ko Li

    (Hong Kong Shue Yan University
    Hefei University of Technology)

  • Chun Kei Tsang

    (Hong Kong Shue Yan University
    Hong Kong Baptist University)

  • Shu Kam Lee

    (Hong Kong Shue Yan University)

Abstract

Economists tend to believe that production technology should exhibit increasing returns to scale first and then constant and finally decreasing returns to scale, called regular variable returns to scale (RVRS) in this paper. Further, a special pattern of RVRS production technology when there is only one output is the production function that has an S-shaped curve along any ray of inputs from the origin. In the literature on efficiency analysis, the most frequently used empirical technology is the variable returns to scale (VRS) production technology. Although it exhibits RVRS, it is unable to model nonconvex production technologies, such as the S-shaped production function. Recently, a new empirical production technology has been introduced to capture RVRS with partial convexity. This paper explores its relationship with efficiency measurement. Furthermore, a novel empirical production technology that can better capture the characteristics of the S-shaped production function is proposed. These two new production technologies provide better alternatives to the commonly used Free Disposal Hull (FDH) production technology in non-convex production with RVRS. Our new production technology is illustrated using US manufacturing industry data. If one believes that the production technology is partially convex and exhibits RVRS, it is found that the conventional VRS production technology overestimates the technical inefficiency of small production units under this belief.

Suggested Citation

  • Sung Ko Li & Chun Kei Tsang & Shu Kam Lee, 2024. "Partially Convex Production Technology and Efficiency Measurement," Journal of Productivity Analysis, Springer, vol. 62(3), pages 303-320, December.
    • Handle: RePEc:kap:jproda:v:62:y:2024:i:3:d:10.1007_s11123-023-00716-w
    DOI: 10.1007/s11123-023-00716-w
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    References listed on IDEAS

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