 What Is the Economic Meaning of FDH?Robert Thrall Journal of Productivity Analysis, 1999, vol. 11, issue 3, 243-250 Abstract: The central feature of the FDH model is the lack of convexity for its production possibility set, TF. Starting with n observed (distinct) decision making units DMU k , each defined by an input-output vector p k =[y k -x k ], domination is defined by ordinary vector inequalities. DMU k is said to dominate DMU j if p k ≥ p j , p k ≠ p j . The FDH production possibility set TF consists of the observed DMU j together with all input-output vectors p=[y k ,−x k ] with y ≥ 0, x ≥ 0, y ≠ 0, x ≠ 0 which are dominated by at least one of the observed DMU j . DMU k is defined as “FDH efficient” if no DMU j dominates it. In the BCC (or variable return to scale) DEA model the production possibility set TB consists of the observed DMU k together with all input-output vectors dominated by any convex combination of them and DMU k is DEA efficient if it is not dominated by any p in TB. In the DEA model, economic meaning is established by the introduction of (non negative) multiplier (price) vectors w=[u,v]. If DMU k is undominated (in TB) then there exists a positive multiplier vector w for which (a) w T p k =u T y k − v T x k ≥ w T p for every p ∈ TB. In everyday language, the net return (or profit) for DMU k relative to the given multiplier vector w is at least as great as that for any production possibility p. On the other hand, if DMU k is FDH but not DEA efficient then it is proved that there exists no positive multiplier vector >w for which (a) holds, i.e. for any positive w there exists at least one DMU j for which w T p j > w T p k . Since, therefore, FDH efficiency does not guarantee price efficiency what is its economic significance? Without economic significance, how can FDH be considered as being more than a mathematical system however logically soundly it may be conceived? Copyright Kluwer Academic Publishers 1999 Date: 1999 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:jproda:v:11:y:1999:i:3:p:243-250 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Productivity Analysis is currently edited by William Greene, Chris O'Donnell and Victor Podinovski More articles in Journal of Productivity Analysis from Springer |
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