Technical and economic efficiency measures under short run profit maximizing behavior

Laurens Cherchye, Timo Kuosmanen and Hervé Leleu

No 2008-ECO-05, Working Papers from IESEG School of Management

Abstract: The duality between measures of economic and technical efficiency has been extensively studied in the productive efficiency analysis. This duality ensures a meaningful interpretation of technical efficiency as economic efficiency evaluated at the most favorable shadow prices. This paper concentrates on economic efficiency as short run profit efficiency. We first argue that a modified version of Varian’s goodness-of-fit measure provides an appropriate economic efficiency measure in that context. Next, we show that a variant of the McFadden gauge function provides a natural dual efficiency measure for this short run profit efficiency measure. In particular, we establish two attractive properties of that technical efficiency measure: (i) it can be interpreted as Varian’s profit efficiency measure evaluated at shadow prices; (ii) it provides an upper bound for profit efficiency.

Keywords: Profit Efficiency; Technical Efficiency; Technology Distance Functions (search for similar items in EconPapers)
JEL-codes: D2 D24 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2008-07
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Related works:
Journal Article: Technical and Economic Efficiency Measures Under Short Run Profit Maximizing Behavior (2010)
Working Paper: Technical and Economic Efficiency Measures under Short Run Profit Maximizing Behavior (2010)
Working Paper: Technical and economic efficiency measures under short run profit maximizing behavior (2010)
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