The Directional Profit Efficiency Measure: On Why Profit Inefficiency is either Technical or Allocative
The directional distance function has been introduced in the efficiency literature with the intention of relaxing the fixed orientations represented by its classical input and output counterparts. However, the criteria underlying the choice of its associated directional vector are numerous. When market prices are observed and firms have a profit maximizing behavior, it seems natural to choose as directional vector that projecting inefficient firms towards profit maximizing benchmarks. Based on that choice of directional vector, we introduce the profit efficiency measure and show that, in this general setting, profit inefficiency can be categorized as either technical -for firms situating in the interior of the technology- or allocative -for firms lying on the frontier. We implement and illustrate the analytical model by way of Data Envelopment Analysis techniques, where the profit maximizing benchmark may not be unique, and introduce the necessary optimizing program for profit inefficiency measurement.
|Date of creation:||Nov 2010|
|Contact details of provider:|| Postal: Francisco Tomás y Valiente, 5, 28049 Madrid|
Web page: http://www.uam.es/departamentos/economicas/analecon/default.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, April.
- Juan Aparicio & José Ruiz & Inmaculada Sirvent, 2007. "Closest targets and minimum distance to the Pareto-efficient frontier in DEA," Journal of Productivity Analysis, Springer, vol. 28(3), pages 209-218, December.
- Maria Silva Portela & Pedro Borges & Emmanuel Thanassoulis, 2003. "Finding Closest Targets in Non-Oriented DEA Models: The Case of Convex and Non-Convex Technologies," Journal of Productivity Analysis, Springer, vol. 19(2), pages 251-269, April.
- Silva Portela, Maria Conceicao A. & Thanassoulis, Emmanuel, 2005. "Profitability of a sample of Portuguese bank branches and its decomposition into technical and allocative components," European Journal of Operational Research, Elsevier, vol. 162(3), pages 850-866, May.
- Bogetoft, Peter & Fare, Rolf & Obel, Borge, 2006.
"Allocative efficiency of technically inefficient production units,"
European Journal of Operational Research,
Elsevier, vol. 168(2), pages 450-462, January.
- Bogetoft, Peter & Fare, Rolf, 1999. "Allocative Efficiency of Technically Inefficient Production Units," Unit of Economics Working papers 24217, Royal Veterinary and Agricultural University, Food and Resource Economic Institute.
- Cooper, W.W. & Pastor, Jesus T. & Aparicio, Juan & Borras, Fernando, 2011. "Decomposing profit inefficiency in DEA through the weighted additive model," European Journal of Operational Research, Elsevier, vol. 212(2), pages 411-416, July.
- Asmild, Mette & Paradi, Joseph C. & Reese, David N. & Tam, Fai, 2007. "Measuring overall efficiency and effectiveness using DEA," European Journal of Operational Research, Elsevier, vol. 178(1), pages 305-321, April.
- Subhash Ray, 2007. "Shadow profit maximization and a measure of overall inefficiency," Journal of Productivity Analysis, Springer, vol. 27(3), pages 231-236, June.
- 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.
- Jean-Paul Chavas & Thomas L. Cox, 1999. "A Generalized Distance Function and the Analysis of Production Efficiency," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 294-318, October.
- Jean-Paul Chavas & Thomas L. Cox, 1999. "A Generalized Distance Function and the Analysis of Production Efficiency," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 422, Wisconsin-Madison Agricultural and Applied Economics Department.
- Charnes, A. & Cooper, W. W. & Golany, B. & Seiford, L. & Stutz, J., 1985. "Foundations of data envelopment analysis for Pareto-Koopmans efficient empirical production functions," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 91-107.
- R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
- Rolf Färe & Shawna Grosskopf, 2000. "Theory and Application of Directional Distance Functions," Journal of Productivity Analysis, Springer, vol. 13(2), pages 93-103, March.
- Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August. Full references (including those not matched with items on IDEAS)