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The Modified Directional Distance Function (MDDF): Economic Inefficiency Decompositions

In: Benchmarking Economic Efficiency

Author

Listed:
  • Jesús T. Pastor

    (Universidad Miguel Hernandez de Elche)

  • Juan Aparicio

    (Universidad Miguel Hernandez de Elche)

  • José L. Zofío

    (Universidad Autónoma de Madrid)

Abstract

As we showed in Chap. 8 , by duality, the directional distance function (DDF) is related to a measure of profit inefficiency that is calculated as the normalized deviation between optimal and actual profit at market prices. However, in the most usual case where the selected directional vector corresponds to the observed values in inputs and outputs of the evaluated firm, the associated normalization coincides with the sum of its actual revenue and the actual cost (see expression ( 8.10 )). Although some authors have interpreted this normalization quantity as an indication of the “size” of the firm (see Leleu & Briec, 2009), it is clear that it has no obvious economic meaning from a managerial point of view since this quantity is not present in day-to-day manager’s control panel for decision-making.

Suggested Citation

  • Jesús T. Pastor & Juan Aparicio & José L. Zofío, 2022. "The Modified Directional Distance Function (MDDF): Economic Inefficiency Decompositions," International Series in Operations Research & Management Science, in: Benchmarking Economic Efficiency, chapter 0, pages 415-431, Springer.
    • Handle: RePEc:spr:isochp:978-3-030-84397-7_11
    DOI: 10.1007/978-3-030-84397-7_11
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