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A DEA approach to derive individual lower and upper bounds for the technical and allocative components of the overall profit efficiency

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  • J L Ruiz

    (Universidad Miguel Hernández)

  • I Sirvent

    (Universidad Miguel Hernández)

Abstract

In this paper, we propose a slack-based data envelopment analysis approach to be used in economic efficiency analyses when the objective is profit maximization. The focus is on the measurement of the technical component of the overall efficiency with the purpose of guaranteeing the achievement of the Pareto efficiency. As a result, we will be able to estimate correctly the allocative component in the sense that this latter only reflects the improvements that can be accomplished by reallocations along the Pareto-efficient frontier. Some new measures of technical and allocative efficiency in terms of both profit ratios and differences of profits are defined. We do not make any assumption on the way the technical efficiency is to be measured, that is, we do not use, for example, either a hyperbolic measure or a directional distance function, which allows us to extend this approach and derive individual lower and upper bounds for these efficiency components. To do it, we use novel models of minimum distance to the frontier. This broadens the range of possibilities for the explanation of the overall efficiency in terms of technical and allocative inefficiencies.

Suggested Citation

  • J L Ruiz & I Sirvent, 2011. "A DEA approach to derive individual lower and upper bounds for the technical and allocative components of the overall profit efficiency," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(11), pages 1907-1916, November.
    • Handle: RePEc:pal:jorsoc:v:62:y:2011:i:11:d:10.1057_jors.2010.140
    DOI: 10.1057/jors.2010.140
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    2. Wen, Yao & An, Qingxian & Gong, Yeming & Wu, Pengkun, 2024. "Structural rearrangement of the network system from an efficiency perspective: A silver lining of profit improvement," European Journal of Operational Research, Elsevier, vol. 316(3), pages 1001-1011.
    3. Pastor, Jesus T. & Zofío, José Luis & Aparicio, Juan & Pastor, D., 2023. "A general direct approach for decomposing profit inefficiency," Omega, Elsevier, vol. 119(C).
    4. Jose Zofio & Jesus Pastor & Juan Aparicio, 2013. "The directional profit efficiency measure: on why profit inefficiency is either technical or allocative," Journal of Productivity Analysis, Springer, vol. 40(3), pages 257-266, December.
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    6. Kao, Chiang, 2024. "Maximum slacks-based measure of efficiency in network data envelopment analysis: A case of garment manufacturing," Omega, Elsevier, vol. 123(C).

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