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Technical and economic efficiency measures under short run profit maximizing behavior

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Author Info
Laurens Cherchye (University of Leuven, Campus Kortrijk and Center for Economic Studies; Fund for Scientific Research - Flanders)
Timo Kuosmanen (Economic Research Unit, MTT Agrifood research Finland)
Hervé Leleu () (CNRS-LEM (UMR 8179), IÉSEG School of Management)

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Abstract

The 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 favorable 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-fit 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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File URL: http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=283760913_2008-ECO-5_Leleu.pdf
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Publisher Info
Paper provided by IESEG School of Management in its series Working Papers with number 2008-ECO-05.

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Length: 16 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:ies:wpaper:e200805

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Related research
Keywords: Profit Efficiency; Technical Efficiency; Technology Distance Functions;

Find related papers by JEL classification:
D2 - Microeconomics - - Production and Organizations
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity

References listed on IDEAS
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  1. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August. [Downloadable!] (restricted)
  2. Salnykov, Mykhaylo & Zelenyuk, Valentin, 2005. "On the Commensurability of Directional Distance Functions," MPRA Paper 7068, University Library of Munich, Germany. [Downloadable!]
  3. Rolf Färe & Shawna Grosskopf & Carl A Pasurka, Jr., 2001. "Accounting for Air Pollution Emissions in Measures of State Manufacturing Productivity Growth," Journal of Regional Science, Blackwell Publishing, vol. 41(3), pages 381-409. [Downloadable!] (restricted)
  4. Robert Russell, R., 1985. "Measures of technical efficiency," Journal of Economic Theory, Elsevier, vol. 35(1), pages 109-126, February. [Downloadable!] (restricted)
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