Decomposition of Profit Efficiency under Alternative Definitions of Technical Efficiency

Subhash Ray and Linge Yang
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Linge Yang: University of Connecticut

No 2022-15, Working papers from University of Connecticut, Department of Economics

Abstract: In this paper we consider alternative multiplicative decompositions of profit efficiency measured by the ratio of the actual profit of a firm to the maximum achievable profit. We use the directional distance function of Chambers, Chung, and Färe (1996) as the generic analytical method for measuring technical efficiency. Alternative choice of directions yields the Shephard input and output distance functions as well as the lesser-known McFadden’s gauge function for measuring technical efficiency. We also present an endogenously determined direction based on the overall efficiency measure of Ray (2007). We show that the McFadden gauge function is the only one that yields a decomposition where both the technical and allocative components of profit efficiency lie between 0 and 1 while the technical efficiency factor is also independent of prices.

Keywords: Directional Distance Function; Gauge Function; Nerlovian Efficiency (search for similar items in EconPapers)
JEL-codes: C61 D24 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-08
New Economics Papers: this item is included in nep-eff
Note: Subhash C. Ray is the corresponding author
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2022-15

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