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Are all Scales Optimal in DEA? Theory and Empirical Evidence

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Author Info

  • Førsund, Finn R.

    ()
    (Department of Economics, University of Oslo)

  • Hjalmarsson, Lennart

    ()
    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

Abstract

Policy recommendations concerning optimal scale of production units often have serious implications for the restructuring of a sector, while tests of natural monopoly have important implications for regulatory structure. The piecewise linear frontier production function framework is becoming the most popular one for assessing not only technical efficiency of operations, but also for scale efficiency and calculation of optimal scale sizes. The main purpose of the present study is to check if neoclassical production theory gives any guidance as to the nature of scale properties in the DEA model, and to empirically investigate such properties. The empirical results indicate that optimal scale may be found over almost the entire size variations in outputs and inputs, thus making policy recommendations about scale efficiency dubious. It is necessary to establish the nature of optimal scale before any practical use can be made. Proposals for such indexes that should be calculated are provided.

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File URL: http://hdl.handle.net/2077/2672
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 66.

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Length: 26 pages
Date of creation: 20 Mar 2002
Date of revision:
Publication status: Published in Journal of Productivity Analysis, 2004, pages 25-48.
Handle: RePEc:hhs:gunwpe:0066

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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research

Keywords: Optimal scale; scale elasticity; data envelopment analysis (DEA); frontier production functions; duals;

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  1. Hanoch, Giora, 1970. "Homotheticity in joint production," Journal of Economic Theory, Elsevier, vol. 2(4), pages 423-426, December.
  2. Starrett, David A, 1977. "Measuring Returns to Scale in the Aggregate, and the Scale Effect of Public Goods," Econometrica, Econometric Society, vol. 45(6), pages 1439-55, September.
  3. Hjalmarsson, Lennart & Veiderpass, Ann, 1992. " Productivity in Swedish Electricity Retail Distribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages S193-205, Supplemen.
  4. Banker, Rajiv D., 1984. "Estimating most productive scale size using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 17(1), pages 35-44, July.
  5. Panzar, John C & Willig, Robert D, 1977. "Economies of Scale in Multi-Output Production," The Quarterly Journal of Economics, MIT Press, vol. 91(3), pages 481-93, August.
  6. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
  7. 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.
  8. Kim, H Youn, 1987. "Economies of Scale in Multi-product Firms: An Empirical Analysis," Economica, London School of Economics and Political Science, vol. 54(214), pages 185-206, May.
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Cited by:
  1. repec:ags:mareec:28143 is not listed on IDEAS
  2. Olesen, Ole B. & Ruggiero, John, 2014. "Maintaining the Regular Ultra Passum Law in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 235(3), pages 798-809.
  3. Kaoru Tone & Miki Tsutsui, 2013. "How to deal with S-shaped curve in DEA," GRIPS Discussion Papers 13-10, National Graduate Institute for Policy Studies.
  4. Førsund , Finn R. & Kittelsen , Sverre A. & Krivonozhko , Vladimir E., 2007. "Farrell Revisited: Visualising the DEA Production Frontier," Memorandum 15/2007, Oslo University, Department of Economics.
  5. Olesen, Ole Bent & Petersen, Niels Christian, 2013. "Imposing the Regular Ultra Passum law in DEA models," Omega, Elsevier, vol. 41(1), pages 16-27.

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