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Are all Scales Optimal in DEA? Theory and Empirical Evidence

Finn Førsund and Lennart Hjalmarsson

No 66, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Policy recommendations concerning optimal scale of production units often have serious implications for the restructuring of a sector, while tests of natural monopoly have important implications for regulatory structure. The piecewise linear frontier production function framework is becoming the most popular one for assessing not only technical efficiency of operations, but also for scale efficiency and calculation of optimal scale sizes. The main purpose of the present study is to check if neoclassical production theory gives any guidance as to the nature of scale properties in the DEA model, and to empirically investigate such properties. The empirical results indicate that optimal scale may be found over almost the entire size variations in outputs and inputs, thus making policy recommendations about scale efficiency dubious. It is necessary to establish the nature of optimal scale before any practical use can be made. Proposals for such indexes that should be calculated are provided.

Keywords: Optimal scale; scale elasticity; data envelopment analysis (DEA); frontier production functions; duals (search for similar items in EconPapers)
JEL-codes: C61 D20 L11 L52 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2002-03-20
New Economics Papers: this item is included in nep-eff
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Published in Journal of Productivity Analysis, 2004, pages 25-48.

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http://hdl.handle.net/2077/2672 (text/html)

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Journal Article: Are all Scales Optimal in DEA? Theory and Empirical Evidence (2004) Downloads
Working Paper: Are all scales optimal in Dea? Theory and empirical evidence (2002) Downloads
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