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A primer on the theory and practice of efficiency and productivity analysis

Luis Orea () and José Zofío

No 2017/05, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

Abstract: This paper introduces the theory and practice of benchmarking the efficiency and productivity of firms, and examines common methodological and empirical choices that researchers face regardless of whether they are performing non-parametric or parametric frontier analyses. We identify different decision forks that researchers encounter, and provide guidance on the options and sequence of steps that should be adopted in order to successfully undertake research in the field. We first summarize the main results of duality theory underlying economic benchmarking, and outline the most popular empirical methods available to undertake efficiency and productivity analyses: DEA and SFA. Afterwards, we discuss several strategies aimed at reducing the dimensionality of the analysis, present a series of models aiming to control for environmental (contextual) variables and endogenous regressors, and discuss the choice of orientation when assessing firms’ efficiency using economic criteria. Subsequently we deal with the issue of enhancing the analysis to account for undesirable attributes, such as risk, or proper detrimental outputs like pollutants, waste, contaminants, etc. We next move on to present alternative definitions of temporal productivity change and their decomposition into several terms, such as efficiency change, technical change, scale effect, and so on. etc. Finally, dynamic efficiency measurement is discussed.

Date: 2017
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