The Law of One Price (LoOP) states that all firms face the same prices for their inputs and outputs in the competitive market equilibrium. This law has powerful implications for productive efficiency analysis, which have remained unexploited thus far. This paper shows how LoOP-based weight restrictions can be incorporated in Data Envelopment Analysis (DEA). Utilizing the relation between the industry level and the firm level cost efficiency measures, we propose to apply a set of input prices that is common for all firms and that maximizes cost efficiency of the industry. Our framework allows for firm-specific output weights and variable returns-to-scale, and preserves the linear programming structure of the standard DEA. We apply the proposed methodology for evaluating research efficiency of economics departments of Dutch Universities. This application shows that the methodology is computationally tractable for practical efficiency analysis, and that it helps in deepening the DEA analysis.
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Paper provided by EconWPA in its series Microeconomics with number
0312006.
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
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Afriat, Sidney N, 1972.
"Efficiency Estimation of Production Function,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
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