Are all scales optimal in Dea? Theory and empirical evidence
AbstractPolicy 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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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 14-2002.
Length: 26 pages
Date of creation: Feb 2002
Date of revision:
Optimal scale; scale elasticity; data envelopment analysis (DEA); frontier production functions; duals;
Other versions of this item:
- Finn Førsund & Lennart Hjalmarsson, 2004. "Are all Scales Optimal in DEA? Theory and Empirical Evidence," Journal of Productivity Analysis, Springer, vol. 21(1), pages 25-48, January.
- Førsund, Finn R. & Hjalmarsson, Lennart, 2002. "Are all Scales Optimal in DEA? Theory and Empirical Evidence," Working Papers in Economics 66, University of Gothenburg, Department of Economics.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D20 - Microeconomics - - Production and Organizations - - - General
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
This paper has been announced in the following NEP Reports:
- NEP-EFF-2003-07-29 (Efficiency & Productivity)
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