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How to properly decompose economic efficiency using technical and allocative criteria with non-homothetic DEA technologies

Juan Aparicio (), Jesus Pastor and José Zofío

No 2013/11, Working Papers in Economic Theory from Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History)

Abstract: We discuss how to properly decompose economic efficiency when the underlying technology is non-homothetic using alternative allocative and technical efficiency criteria. We first show that only under the production of one output and assuming the particular case of constant returns to scale homotheticity, we may claim that the standard radial models correctly measure pure technical efficiency. Otherwise, when non-homotheticity is assumed, we then show that these traditional estimations would measure an undetermined mix of technical and allocative efficiency. To restore a consistent measure of technical efficiency in the non-homothetic case we introduce a new methodology that takes as reference for the economic efficiency decomposition the preservation of the allocative efficiency of firms producing in the interior of the technology. This builds upon the so-called reversed approach recently introduced by Bogetoft et al. (2006) that allows estimating allocative efficiency without presuming that technical efficiency has been already accomplished. We illustrate our methodology within the Data Envelopment Analysis framework adopting the most simple nonhomothetic BCC model and a numerical example. We show that there are significant differences in the allocative and technical efficiency scores depending on the approach.

Keywords: Data Envelopment Analysis; Overall efficiency; Technical efficiency; Allocative efficiency; Homotheticity. (search for similar items in EconPapers)
JEL-codes: C61 D21 D24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff
Date: 2013-12
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Journal Article: How to properly decompose economic efficiency using technical and allocative criteria with non-homothetic DEA technologies (2015) Downloads
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