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Inner and Outer Approximations of Technology: A Shadow Profit Approach

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  • Hervé Leleu

    () (CNRS-LEM (UMR 8179) and IESEG School of Management)

Abstract

In this paper we extend the taxonomy on inner and outer approximations to a technology by assuming that price data are not available. Mimicking Varian [Econometrica, 52(3) (1984) 579] we introduce a Weak Axiom of Shadow Profit Maximization (WASPM) to test if observed production plans are compatible with technically efficient behavior. If the test fails for an observed sample, we then characterize the maximal subset of observed production plans that meets WASPM and we derive lower and upper bounds on technical efficiency for production plans that are observed but not in this subset. We also derive linear programs to implement these bounds.

Suggested Citation

  • Hervé Leleu, 2012. "Inner and Outer Approximations of Technology: A Shadow Profit Approach," Working Papers 2012-ECO-06, IESEG School of Management.
  • Handle: RePEc:ies:wpaper:e201206
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    References listed on IDEAS

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    12. Banker, Rajiv D & Maindiratta, Ajay, 1988. "Nonparametric Analysis of Technical and Allocative Efficiencies in Production," Econometrica, Econometric Society, vol. 56(6), pages 1315-1332, November.
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    Cited by:

    1. Portela, Maria Conceição A. Silva & Thanassoulis, Emmanuel, 2014. "Economic efficiency when prices are not fixed: disentangling quantity and price efficiency," Omega, Elsevier, vol. 47(C), pages 36-44.
    2. Subhash C. Ray, 2017. "The Transformation Function, Technical Efficiency, and the CCR Ratio," Working papers 2017-09, University of Connecticut, Department of Economics.
    3. Cherchye, Laurens & De Rock, Bram & Walheer, Barnabé, 2016. "Multi-output profit efficiency and directional distance functions," Omega, Elsevier, vol. 61(C), pages 100-109.
    4. Fu, Tsu-Tan & Juo, Jia-Ching & Chiang, Han-Chin & Yu, Ming-Miin & Huang, Mei-ying, 2016. "Risk-based decompositions of the meta profit efficiency of Taiwanese and Chinese banks," Omega, Elsevier, vol. 62(C), pages 34-46.

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    Keywords

    Technical efficiency; Shadow prices; Bounds on inefficiency;

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