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Superlative approximation of the Luenberger-Hicks-Moorsteen productivity indicator: Theory and application

Frederic Ang () and Pieter Jan Kerstens ()
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Frederic Ang: Business Economics Group, Wageningen University
Pieter Jan Kerstens: Department of Food and Resource Economics, University of Copenhagen

No 2018/10, IFRO Working Paper from University of Copenhagen, Department of Food and Resource Economics

Abstract: Consisting of the difference between an output indicator and an input indicator, the Luenberger-Hicks-Moorsteen (LHM) productivity indicator allows straightforward interpretation. However, it requires estimation of distance functions that are inherently unknown. This paper shows that a simple Bennet profit indicator is a superlative approximation of the LHM indicator when one can assume profit-maximizing behavior and the input and output directional distance functions can be represented up to the second order by a quadratic functional form. We also show that the Luenberger and LHM-approximating Bennet indicators coincide for an appropriate choice of the directional vectors. Focusing on a large sample of Italian food and beverages companies for the years 1995-2007, we empirically investigate the extent to which this theoretical equivalence translates into similar estimates.

Keywords: Productivity and competitiveness; Bennet; Luenberger-Hicks-Moorsteen; superlative approximation; Italian food and beverages sector (search for similar items in EconPapers)
JEL-codes: C43 D21 D22 D24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff
Date: 2018-11
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