A Unifying Framework for Farrell Profit Efficiency Measurement

Rolf Färe (), Xinju He (), Sungko Li () and Valentin Zelenyuk
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Rolf Färe: Department of Economics, Oregon State University, Corvallis, Oregon 97331
Xinju He: Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong
Sungko Li: Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong

Operations Research, 2019, vol. 67, issue 1, 183-197

Abstract: Measuring profit efficiency is a challenging task, and many different approaches have been suggested. This paper synthesizes existing approaches and develops a general Farrell-type approach of the profit efficiency measurement. Our derivations unveil new and useful relationships between existing measures and the proposed new Farrell-type measures. In addition, this helps us establish a generalized and unifying framework for studying efficiency behavior of firms, where the profit efficiency measure satisfies desirable properties and contains the conventional Farrell measures of technical efficiency and allocative efficiency as multiplicative components. A new component of the decomposition of profit efficiency, which we call the revenue-efficient allocative efficiency measure , is introduced to identify the necessary changes of input scale and input mix in addition to output changes. The proposed new approach also encompasses and is coherent with profit-maximizing behavior as a benchmark case.

Keywords: profit efficiency; Farrell-type measures; revenue-efficient allocative efficiency; invariance property of allocative efficiency measure (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (31)

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