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Average-cost efficiency and optimal scale sizes in non-parametric analysis

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  • Cesaroni, Giovanni
  • Giovannola, Daniele

Abstract

Under fairly general assumptions requiring neither a differentiable frontier nor a constant-returns-to-scale technology, this paper introduces a new definition of an optimal scale size based on the minimization of unit costs. The corresponding measure, average-cost efficiency, combines scale and allocative efficiency, and generalizes the measurement of scale economies in efficiency analysis while providing a performance criterion which is stricter than both cost efficiency and scale efficiency measurement. The average-cost efficiency is not reliant upon the uniformity of the firms’ input-price vector, and we supply procedures to compute it in both convex and non-convex production technologies. Empirical illustration of the theoretical results is given with reference to large sets of production units.

Suggested Citation

  • Cesaroni, Giovanni & Giovannola, Daniele, 2015. "Average-cost efficiency and optimal scale sizes in non-parametric analysis," European Journal of Operational Research, Elsevier, vol. 242(1), pages 121-133.
    • Handle: RePEc:eee:ejores:v:242:y:2015:i:1:p:121-133
    DOI: 10.1016/j.ejor.2014.09.062
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    Cited by:

    1. Kristiaan Kerstens & Ignace Van de Woestyne, 2021. "Cost functions are nonconvex in the outputs when the technology is nonconvex: convexification is not harmless," Annals of Operations Research, Springer, vol. 305(1), pages 81-106, October.
    2. Cesaroni, Giovanni, 2018. "Industry cost efficiency in data envelopment analysis," Socio-Economic Planning Sciences, Elsevier, vol. 61(C), pages 37-43.
    3. Subhash C. Ray & John Walden & Lei Chen, 2018. "Economic Measures of Capacity Utilization: A Nonparametric Cost Function Analysis," Working papers 2018-02, University of Connecticut, Department of Economics.
    4. Cesaroni, Giovanni & Kerstens, Kristiaan & Van de Woestyne, Ignace, 2017. "Global and local scale characteristics in convex and nonconvex nonparametric technologies: A first empirical exploration," European Journal of Operational Research, Elsevier, vol. 259(2), pages 576-586.
    5. Walter Briec & Kristiaan Kerstens & Ignace Van de Woestyne, 2022. "Nonconvexity in Production and Cost Functions: An Exploratory and Selective Review," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 18, pages 721-754, Springer.
    6. Cesaroni, Giovanni, 2020. "Technically and cost-efficient centralized allocations in data envelopment analysis," Socio-Economic Planning Sciences, Elsevier, vol. 70(C).
    7. Kuzminov A.N. & Dzhukha V.M. & Ternovsky O.A. & Mikhnenko T.N., 2018. "Cenological Measurement of Productive Efficiency," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 2), pages 27-36.
    8. Hajar Haghighatpisheh & Sohrab Kordrostami & Alireza Amirteimoori & Farhad Hosseinzadeh Lotfi, 2022. "Optimal scale sizes in input–output allocative data envelopment analysis models," Annals of Operations Research, Springer, vol. 315(2), pages 1455-1476, August.
    9. Somayye Karimi Omshi & Sohrab Kordrostami & Alireza Amirteimoori & Armin Ghane Kanafi, 2024. "Optimal scale sizes in economic efficiency models with integer measures: a case study of foundry industry," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(2), pages 545-564, December.
    10. Giovanni Cesaroni & Kristiaan Kerstens & Ignace Van de Woestyne, 2017. "Estimating scale economies in non-convex production models," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(11), pages 1442-1451, November.
    11. Podinovski, Victor V. & Bouzdine-Chameeva, Tatiana, 2019. "Cone extensions of polyhedral production technologies," European Journal of Operational Research, Elsevier, vol. 276(2), pages 736-743.
    12. Ray, Subhash C. & Walden, John & Chen, Lei, 2021. "Economic measures of capacity utilization: A nonparametric short-run cost function analysis," European Journal of Operational Research, Elsevier, vol. 293(1), pages 375-387.

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