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Technical and economic efficiency measures under short run profit maximizing behavior

Author

Listed:
  • L. Cherchye
  • T. Kuosmanen
  • H. Leleu

    (LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - CNRS - Centre National de la Recherche Scientifique)

Abstract

The duality between measures of economic and technical efficiency has been extensively studied in the productive efficiency analysis. This duality ensures a meaningful interpretation of technical efficiency as economic efficiency evaluated at the most favorable shadow prices. This paper concentrates on economic efficiency as short run profit efficiency. We first argue that a modified version of Varian’s goodness-of-fit measure provides an appropriate economic efficiency measure in that context. Next, we show that a variant of the McFadden gauge function provides a natural dual efficiency measure for this short run profit efficiency measure. In particular, we establish two attractive properties of that technical efficiency measure: (i) it can be interpreted as Varian’s profit efficiency measure evaluated at shadow prices; (ii) it provides an upper bound for profit efficiency.
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Suggested Citation

  • L. Cherchye & T. Kuosmanen & H. Leleu, 2010. "Technical and economic efficiency measures under short run profit maximizing behavior," Post-Print halshs-00569132, HAL.
    • Handle: RePEc:hal:journl:halshs-00569132
    DOI: 10.3917/rel.762.0163
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    1. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.),Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1, McMaster University Archive for the History of Economic Thought.
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    Cited by:

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    2. Cherchye, Laurens & De Rock, Bram & Hennebel, Veerle, 2014. "The economic meaning of Data Envelopment Analysis: A ‘behavioral’ perspective," Socio-Economic Planning Sciences, Elsevier, vol. 48(1), pages 29-37.
    3. Kumbhakar, Subal C., 2013. "Specification and estimation of multiple output technologies: A primal approach," European Journal of Operational Research, Elsevier, vol. 231(2), pages 465-473.
    4. Rolf Färe & Xinju He & Sungko Li & Valentin Zelenyuk, 2019. "A Unifying Framework for Farrell Profit Efficiency Measurement," Operations Research, INFORMS, vol. 67(1), pages 183-197, January.

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    More about this item

    Keywords

    profit efficiency; technical efficiency; technology distance functions;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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