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Industry Inefficiency Measures: A Unifying Approximation Proposition

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Abstract

The inefficiency of an industry (or a group of firms or production plants) is defined as the difference between the observed production of the industry and the potential production that would be possible if all the resources were to be allocated and used efficiently. In this paper we provide an approximation proposition that simplifies the computation and interpretation of various industry inefficiency measures proposed in the literature. The computational advantage is to reduce a number of (possibly) complicated integer-nonlinear programs to a simple linear version (via approximation). From an interpretational point of view, we show that all models may refer to a very simple basic model for many types of aggregate analysis. This is basically a unifying tool for a literature that has been fragmented and dispersed on this topic.

Suggested Citation

  • Hien Thu Pham & Antonio Peyrache, 2015. "Industry Inefficiency Measures: A Unifying Approximation Proposition," CEPA Working Papers Series WP102015, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqcepa:108
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