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Profit Efficiency Analysis Under Limited Information. With an Application to German Farm Types

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Author Info
Laurens Cherchye ()
Tom Van Puyenbroeck

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Abstract

Lack of information about technology and prices often hampers the empirical assessment of the validity of the profit maximization hypothesis. We show that the non-parametric Data Envelopment Analysis (DEA) methodology comprises natural tools for dealing with such incomplete information. In particular, we focus on the economic meaning of the DEA model that builds on assumptions of monotone and convex production possibility sets, and provide some extensions that further exploit this economic interpretation. This perspective on DEA is all the more attractive since its original use for technical efficiency analysis is sometimes questionable given its restrictive production assumptions. An application to German farm types complements our methodological discussion. By using nonparametric tools to test specific hypotheses about profit differences, we further demonstrate the potential of the non-parametric approach in deriving strong and robust statistical evidence while imposing minimal structure on the setting under study.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics in its series Public Economics Working Paper Series with number ces0202.

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Length: 28 pp.
Date of creation: 2002
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Handle: RePEc:wpe:papers:ces0202

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Related research
Keywords: profit maximization hypothesis; Data Envelopment Analysis; non-parametric techniques; agriculture;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
P32 - Economic Systems - - Socialist Institutions and Their Transitions - - - Collectives; Communes; Agricultural Institutions
Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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References listed on IDEAS
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  1. Allen, Douglas W & Lueck, Dean, 1998. "The Nature of the Farm," Journal of Law & Economics, University of Chicago Press, vol. 41(2), pages 343-86, October.
  2. Simar, L. & Wilson, P.W., 1999. "Statistical Inference in Nonparametric Frontier Models: the State of the Art," Papers 9904, Catholique de Louvain - Institut de statistique.
  3. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November. [Downloadable!] (restricted)
  4. Sarris, Alexander H & Doucha, Tomas & Mathijs, Erik, 1999. "Agricultural Restructuring in Central and Eastern Europe: Implications for Competitiveness and Rural Development," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 26(3), pages 305-29, August.
  5. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140. [Downloadable!] (restricted)
  6. Erik Mathijs & Johan F. M. Swinnen, 2001. "Production Organization And Efficiency During Transition: An Empirical Analysis Of East German Agriculture," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 100-107, February. [Downloadable!] (restricted)
  7. Talluri, Srinivas & Whiteside, Mary M. & Seipel, Scott J., 2000. "A nonparametric stochastic procedure for FMS evaluation," European Journal of Operational Research, Elsevier, vol. 124(3), pages 529-538, August. [Downloadable!] (restricted)
  8. Laurens Cherchye & Tom Van Puyenbroeck, 2001. "Technical Efficiency Evaluation: Naturally Dual!," Public Economics Working Paper Series wptchff, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics. [Downloadable!]
  9. Piesse, Jenifer & Thirtle, Colin & Turk, Jernej, 1996. "Efficiency and Ownership in Slovene Dairying: A Comparison of Econometric and Programming Techniques," Journal of Comparative Economics, Elsevier, vol. 22(1), pages 1-22, February. [Downloadable!] (restricted)
  10. FERRIERÊ , GaryÊ & KERSTENSÊ, Kris & VANDENÊEECKAUTÊ, Philippe, 1994. "Radial and Nonradial Technical Efficiency Measures on a DEA Reference Technology : A Comparison using US Banking Data," CORE Discussion Papers 1994023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. M. J. Farrell, 1959. "The Convexity Assumption in the Theory of Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 67, pages 377. [Downloadable!] (restricted)
  12. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. Faere,Rolf & Grosskopf,Shawna, 1987. "On price efficiency," Discussion Paper Serie A 119, University of Bonn, Germany.
    Other versions:
    • Fare, Rolf & Grosskopf, Shawna & Nelson, Julianne, 1990. "On Price Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 709-20, August. [Downloadable!] (restricted)
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