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A Unifying Framework for Farrell Efficiency Measurement Coherent with Profit-maximizing Principle

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Abstract

Measuring profit efficiency is a challenging task. This paper synthesizes existing approaches to form a general Farrell-type model of profit efficiency. Our derivations help us unveil new and interesting relationship between existing profit efficiency measures and the Farrell-type profit efficiency measures. In turn, this helps us establishing a complete framework of studying efficiency behavior of firms, where the profit efficiency measure satisfies some desirable properties and contains Farrell output-oriented or input-oriented measures of technical efficiency and allocative efficiency as multiplicative elements. The new component, revenue efficient allocative efficiency, introduced in this paper can help firms to make decision and has not been studied in the literature before.

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  • Rolf Färe & Xinju He & Sungko Li & Valentin Zelenyuk, 2016. "A Unifying Framework for Farrell Efficiency Measurement Coherent with Profit-maximizing Principle," CEPA Working Papers Series WP052016, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqcepa:115
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    File URL: https://economics.uq.edu.au/files/5046/WP052016.pdf
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    Cited by:

    1. Färe, Rolf & Zelenyuk, Valentin, 2020. "Profit efficiency: Generalization, business accounting and the role of convexity," Economics Letters, Elsevier, vol. 196(C).
    2. Rolf Färe & Valentin Zelenyuk, 2020. "Profit Efficiency and its Estimation," CEPA Working Papers Series WP072020, School of Economics, University of Queensland, Australia.

    More about this item

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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