Technical and Economic Efficiency Measures under Short Run Profit Maximizing Behavior
AbstractThe 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 favourable 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-it 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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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2010022.
Date of creation: 01 Jun 2010
Date of revision:
Profit effiency; Technical efficiency; Technology distance functions;
Other versions of this item:
- Laurens Cherchye & Timo Kuosmanen & Hervé Leleu, 2010. "Technical and Economic Efficiency Measures Under Short Run Profit Maximizing Behavior," Recherches économiques de Louvain, De Boeck Université, vol. 76(2), pages 163-173.
- Laurens Cherchye & Timo Kuosmanen & Hervé Leleu, 2008. "Technical and economic efficiency measures under short run profit maximizing behavior," Working Papers 2008-ECO-05, IESEG School of Management.
- D2 - Microeconomics - - Production and Organizations
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
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