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Profit Efficiency and its Estimation

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Abstract

n this article, we revisit the profit efficiency measurement theory and estimation. We derive a new theoretical result that shows the Nerlovian profit efficiency is a special case of the recently introduced general profit efficiency measure. We also present a new decomposition of profit efficiency. Finally, we also outline a simple way of estimating profit efficiency in the Data Envelopment Analysis (DEA) and Free Disposal Hull (FDH) frameworks, while avoiding the computational intensity of linear programming and circumventing the lack of more detailed data.

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  • Rolf Färe & Valentin Zelenyuk, 2020. "Profit Efficiency and its Estimation," CEPA Working Papers Series WP072020, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqcepa:150
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    File URL: https://economics.uq.edu.au/files/19614/WP072020.pdf
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    1. Fare, Rolf & Grosskopf, Shawna, 1985. " Nonparametric Cost Approach to Scale Efficiency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(4), pages 594-604.
    2. Léopold Simar & Paul W. Wilson, 2015. "Statistical Approaches for Non-parametric Frontier Models: A Guided Tour," International Statistical Review, International Statistical Institute, vol. 83(1), pages 77-110, April.
    3. Kneip, Alois & Simar, Léopold & Wilson, Paul W., 2008. "Asymptotics And Consistent Bootstraps For Dea Estimators In Nonparametric Frontier Models," Econometric Theory, Cambridge University Press, vol. 24(6), pages 1663-1697, December.
    4. Rolf Fare & Shawna Grosskopf & Valentin Zelenyuk, 2008. "Aggregation of Nerlovian profit indicator," Applied Economics Letters, Taylor & Francis Journals, vol. 15(11), pages 845-847.
    5. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    6. R. G. Chambers & Y. Chung & R. Färe, 1998. "Profit, Directional Distance Functions, and Nerlovian Efficiency," Journal of Optimization Theory and Applications, Springer, vol. 98(2), pages 351-364, August.
    7. Färe, Rolf & Zelenyuk, Valentin, 2019. "On Luenberger input, output and productivity indicators," Economics Letters, Elsevier, vol. 179(C), pages 72-74.
    8. Rolf Färe & Xinju He & Sungko Li & Valentin Zelenyuk, 2019. "A Unifying Framework for Farrell Profit Efficiency Measurement," Operations Research, INFORMS, vol. 67(1), pages 183-197, January.
    9. Kao, Chiang, 2014. "Network data envelopment analysis: A review," European Journal of Operational Research, Elsevier, vol. 239(1), pages 1-16.
    10. Zelenyuk, Valentin, 2020. "Aggregation of inputs and outputs prior to Data Envelopment Analysis under big data," European Journal of Operational Research, Elsevier, vol. 282(1), pages 172-187.
    11. 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.
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    More about this item

    Keywords

    Profit Efficiency; Data Envelopment Analysis; DEA; Free Disposal Hull; FDH.;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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