Firm and Industry Level Profit Efficiency Analysis Under Incomplete Price Data: A Nonparametric Approach based on Absolute and Uniform Shadow Prices
AbstractWe 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 InfoPaper provided by EconWPA in its series Microeconomics with number 0509011.
Length: 31 pages
Date of creation: 30 Sep 2005
Date of revision:
Note: Type of Document - pdf; pages: 31
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Profit Efficiency; Industry Inefficiency; Data Envelopment Analysis; Absolute Prices; Law of One Price; Weight Restrictions; Simulation;
Other versions of this item:
- Kuosmanen, T. & Kortelainen, M. & Sipilainen, T. & Cherchye, Laurens, 2010. "Firm and industry level profit efficiency analysis under incomplete price data: a nonparametric apporach based on absolute and uniform shadow prices," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/237066, Katholieke Universiteit Leuven.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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