Data Envelopment Analysis

Vincent Blackburn, Shae Brennan and John Ruggiero
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Vincent Blackburn: New South Wales Department of Education and Communities
Shae Brennan: University of Cincinnati
John Ruggiero: University of Dayton

Chapter Chapter 2 in Nonparametric Estimation of Educational Production and Costs using Data Envelopment Analysis, 2014, pp 11-49 from Springer

Abstract: Abstract Analysis of performance has economic production theory as its foundation. Firms employ inputs to produce output with an incentive to either maximize profits or minimize costs. Technically inefficient firms could either increase outputs (and therefore revenue) holding inputs constant or could decrease inputs (and hence costs) holding outputs constant. As a result, technically inefficient firms are neither profit maximizing nor cost minimizing. The seminal paper on technical efficiency measurement was Farrell (1957) which provided a decomposition of inefficiency into technical and allocative parts. From an input-oriented perspective, firms that are not operating on the isoquant associated with observed production are technically inefficient. Farrell provided a comprehensive measure of technical efficiency as the equiproportional reduction of all inputs holding output at current levels. Proportional reduction in observed inputs holds the input mix constant. Cost minimization, however, requires not only production on the isoquant but also the appropriate mix of inputs that depends on the associated input prices. Hence, if technically efficient firms are not using the allocatively efficient input mix they could still lower costs by adjusting input levels accordingly.

Keywords: Technical Inefficiency; Scale Efficiency Measure; Isoquant; Equiproportionate Reduction; Allocate Parts (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/978-1-4899-7469-3_2

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