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A primer on the theory and practice of efficiency and productivity analysis

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  • Orea, Luis
  • Zofío, José L.

Abstract

This paper introduces the theory and practice of benchmarking the efficiency and productivity of firms, and examines common methodological and empirical choices that researchers face regardless of whether they are performing non-parametric or parametric frontier analyses. We identify different decision forks that researchers encounter, and provide guidance on the options and sequence of steps that should be adopted in order to successfully undertake research in the field. We first summarize the main results of duality theory underlying economic benchmarking, and outline the most popular empirical methods available to undertake efficiency and productivity analyses: DEA and SFA. Afterwards, we discuss several strategies aimed at reducing the dimensionality of the analysis, present a series of models aiming to control for environmental (contextual) variables and endogenous regressors, and discuss the choice of orientation when assessing firms’ efficiency using economic criteria. Subsequently we deal with the issue of enhancing the analysis to account for undesirable attributes, such as risk, or proper detrimental outputs like pollutants, waste, contaminants, etc. We next move on to present alternative definitions of temporal productivity change and their decomposition into several terms, such as efficiency change, technical change, scale effect, and so on. etc. Finally, dynamic efficiency measurement is discussed.

Suggested Citation

  • Orea, Luis & Zofío, José L., 2017. "A primer on the theory and practice of efficiency and productivity analysis," Efficiency Series Papers 2017/05, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
  • Handle: RePEc:oeg:wpaper:2017/05
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    File URL: https://www.unioviedo.es/oeg/ESP/esp_2017_05.pdf
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    References listed on IDEAS

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    1. Juan Aparicio & Fernando Borras & Jesus T. Pastor & Jose L. Zofio, 2016. "Loss Distance Functions and Profit Function: General Duality Results," International Series in Operations Research & Management Science, in: Juan Aparicio & C. A. Knox Lovell & Jesus T. Pastor (ed.), Advances in Efficiency and Productivity, chapter 0, pages 71-96, Springer.
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    Cited by:

    1. Orea, Luis & Álvarez, Inmaculada C., 2019. "A new stochastic frontier model with cross-sectional effects in both noise and inefficiency terms," Journal of Econometrics, Elsevier, vol. 213(2), pages 556-577.
    2. Rodriguez-Alvarez, Ana & Orea, Luis & Jamasb, Tooraj, 2019. "Fuel poverty and Well-Being:A consumer theory and stochastic frontier approach," Energy Policy, Elsevier, vol. 131(C), pages 22-32.
    3. Manuel Salas-Velasco, 2020. "Measuring and explaining the production efficiency of Spanish universities using a non-parametric approach and a bootstrapped-truncated regression," Scientometrics, Springer;Akadémiai Kiadó, vol. 122(2), pages 825-846, February.
    4. Ferreira, Diogo Cunha & Marques, Rui Cunha & Pedro, Maria Isabel, 2018. "Explanatory variables driving the technical efficiency of European seaports: An order-α approach dealing with imperfect knowledge," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 119(C), pages 41-62.

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