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Profit Efficiency Analysis Under Limited Information. With an Application to German Farm Types

  • Laurens Cherchye

    ()

  • Tom Van Puyenbroeck

Lack of information about technology and prices often hampers the empirical assessment of the validity of the profit maximization hypothesis. We show that the non-parametric Data Envelopment Analysis (DEA) methodology comprises natural tools for dealing with such incomplete information. In particular, we focus on the economic meaning of the DEA model that builds on assumptions of monotone and convex production possibility sets, and provide some extensions that further exploit this economic interpretation. This perspective on DEA is all the more attractive since its original use for technical efficiency analysis is sometimes questionable given its restrictive production assumptions. An application to German farm types complements our methodological discussion. By using nonparametric tools to test specific hypotheses about profit differences, we further demonstrate the potential of the non-parametric approach in deriving strong and robust statistical evidence while imposing minimal structure on the setting under study.

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File URL: http://www.econ.kuleuven.ac.be/ew/academic/econover/Papers/DPS0202.pdf
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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics in its series Public Economics Working Paper Series with number ces0202.

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Length: 28 pp.
Date of creation: 2002
Date of revision:
Handle: RePEc:wpe:papers:ces0202
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  1. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
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  14. Laurens Cherchye & Tom Van Puyenbroeck, 2001. "Technical Efficiency Evaluation: Naturally Dual!," Public Economics Working Paper Series wptchff, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  15. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January.
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  21. Talluri, Srinivas & Whiteside, Mary M. & Seipel, Scott J., 2000. "A nonparametric stochastic procedure for FMS evaluation," European Journal of Operational Research, Elsevier, vol. 124(3), pages 529-538, August.
  22. Sarris, Alexander H & Doucha, Tomas & Mathijs, Erik, 1999. "Agricultural Restructuring in Central and Eastern Europe: Implications for Competitiveness and Rural Development," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(3), pages 305-29, August.
  23. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1 McMaster University Archive for the History of Economic Thought.
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