A unifying framework for farrell profit efficiency measurement

Rolf Färe, Xinju He, Sung Ko LI, Valentin Zelenyuk

    Research output: Contribution to journalJournal articlepeer-review

    29 Citations (Scopus)

    Abstract

    Measuring profit efficiency is a challenging task, and many different approaches have been suggested. This paper synthesizes existing approaches and develops a general Farrell-type approach of the profit efficiency measurement. Our derivations unveil new and useful relationships between existing measures and the proposed new Farrell-type measures. In addition, this helps us establish a generalized and unifying framework for studying efficiency behavior of firms, where the profit efficiency measure satisfies desirable properties and contains the conventional Farrell measures of technical efficiency and allocative efficiency as multiplicative components. A new component of the decomposition of profit efficiency, which we call the revenue-efficient allocative efficiency measure, is introduced to identify the necessary changes of input scale and input mix in addition to output changes. The proposed new approach also encompasses and is coherent with profit-maximizing behavior as a benchmark case.

    Original languageEnglish
    Pages (from-to)183-197
    Number of pages15
    JournalOperations Research
    Volume67
    Issue number1
    DOIs
    Publication statusPublished - Jan 2019

    Scopus Subject Areas

    • Computer Science Applications
    • Management Science and Operations Research

    User-Defined Keywords

    • Farrell-type measures
    • Invariance property of allocative efficiency measure
    • Profit efficiency
    • Revenue-efficient allocative efficiency

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