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Profit efficiency analysis under limited information with an application to German farm types

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  • Cherchye, Laurens
  • Van Puyenbroeck, Tom

Abstract

Lack of information about technology and prices often hampers the empirical assessment of the profit maximization hypothesis (viz. by measuring the degree of profit efficiency). The non-parametric Data Envelopment Analysis (DEA) methodology can deal with such incomplete information. We exploit the implicit but largely neglected profit interpretation of the DEA model that builds on assumptions of monotone and convex production possibility sets. We show how its embedded assessment of necessary conditions for profit maximization can be strengthened given partial information in the form of monetary sub-cost/-revenue data (that are often easier obtained than the pure quantity data). Finally, we argue that a 'mix' efficiency analysis is naturally complementary to such a profit efficiency analysis. An application to German farm types complements our methodological discussion. By using non-parametric statistical tests, we further demonstrate the potential of the non-parametric approach in deriving strong and robust statistical evidence while imposing minimal structure on the setting under study. In particular, we look for significant efficiency variation over regions.

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Bibliographic Info

Article provided by Elsevier in its journal Omega.

Volume (Year): 35 (2007)
Issue (Month): 3 (June)
Pages: 335-349

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Handle: RePEc:eee:jomega:v:35:y:2007:i:3:p:335-349

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Keywords: Profit maximization hypothesis Data envelopment analysis Non-parametric techniques Agriculture;

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References

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Citations

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Cited by:
  1. Laurens Cherchye & Bram De Rock, 2013. "The Economic Meaning of Data Envelopment Analysis: a "Behavioral" Perspective," Working Papers ECARES 2013/137577, ULB -- Universite Libre de Bruxelles.
  2. Leleu, Hervé, 2013. "Inner and outer approximations of technology: A shadow profit approach," Omega, Elsevier, vol. 41(5), pages 868-871.
  3. Zhao, Y. & Triantis, K. & Murray-Tuite, P. & Edara, P., 2011. "Performance measurement of a transportation network with a downtown space reservation system: A network-DEA approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(6), pages 1140-1159.
  4. Avkiran, Necmi K., 2009. "Opening the black box of efficiency analysis: An illustration with UAE banks," Omega, Elsevier, vol. 37(4), pages 930-941, August.
  5. Odeck, James, 2009. "Statistical precision of DEA and Malmquist indices: A bootstrap application to Norwegian grain producers," Omega, Elsevier, vol. 37(5), pages 1007-1017, October.
  6. Kuosmanen, Timo & Kazemi Matin, Reza, 2011. "Duality of weakly disposable technology," Omega, Elsevier, vol. 39(5), pages 504-512, October.

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