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Firm and Industry Level Profit Efficiency Analysis Under Incomplete Price Data: A Nonparametric Approach based on Absolute and Uniform Shadow Prices

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Author Info

  • Timo Kuosmanen

    (Wageningen University, Environmental Economics & Natural Resources Group)

  • Mika Kortelainen

    (University of Joensuu, Department of Business & Economics)

  • Timo Sipiläinen

    (Agrifood Research Finland, MTT Economic Research)

  • Laurens Cherchye

    (Catholic University of Leuven, Campus Kortrijk & Center for Economic Studies)

Abstract

We discuss the nonparametric approach to profit efficiency analysis at the firm and industry levels in the absence of complete price information, and propose two new insights. First, choosing one commodity (whose price is known) as a numeraire good enables us to measure profit inefficiency in absolute monetary terms. Second, imposing a ‘Law of One Price’ (LoOP) constraint that all firms should be evaluated in terms of the same input-output prices allows us to aggregate firm-level profit inefficiencies to the overall industry inefficiency. Moreover, the LoOP restrictions increase the discriminatory power of the method by better capturing firm-level allocative inefficiencies. Besides the measurement of profit losses, the presented approach enables one to recover absolute price information from quantity data. We conduct a series of Monte Carlo simulations to study the performance of the proposed approach in controlled production environments.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0509011.

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Length: 31 pages
Date of creation: 30 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpmi:0509011

Note: Type of Document - pdf; pages: 31
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Web page: http://128.118.178.162

Related research

Keywords: Profit Efficiency; Industry Inefficiency; Data Envelopment Analysis; Absolute Prices; Law of One Price; Weight Restrictions; Simulation;

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References

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  1. SIMAR, Léopold & WILSON, Paul, 1995. "Sensitivity Analysis to Efficiency Scores : How to Bootstrap in Nonparametric Frontier Models," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1995043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Kuosmanen, Timo & Post, Thierry, 2001. "Measuring economic efficiency with incomplete price information: With an application to European commercial banks," European Journal of Operational Research, Elsevier, vol. 134(1), pages 43-58, October.
  3. Kneip, Alois & Park, Byeong U. & Simar, L opold, 1998. "A Note On The Convergence Of Nonparametric Dea Estimators For Production Efficiency Scores," Econometric Theory, Cambridge University Press, vol. 14(06), pages 783-793, December.
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  15. Fare, Rolf & Grosskopf, Shawna, 1995. "Nonparametric tests of regularity, Farrell efficiency, and goodness-of-fit," Journal of Econometrics, Elsevier, vol. 69(2), pages 415-425, October.
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  19. Blackorby, C. & Russell, R.R., 1996. "Aggregation of Efficiency Indices," G.R.E.Q.A.M. 96a25, Universite Aix-Marseille III.
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Cited by:
  1. Mika Kortelainen & Timo Kuosmanen, 2005. "Eco-Efficiency Analysis of Consumer Durables Using Absolute Shadow Prices," Public Economics, EconWPA 0511022, EconWPA.

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