The law of one price in data envelopment analysis: Restricting weight flexibility across firms
Kuosmanen, T.K. ; Cherchye, L. ; Sipiläinen, T. - \ 2006
European Journal of Operational Research 170 (2006)3. - ISSN 0377-2217 - p. 735 - 757.
measuring economic-efficiency - nonparametric approach - models - aggregation - information - assumptions - dea
The Law of One Price (LoOP) states that all firms face the same prices for their inputs and outputs under market equilibrium. Taken here as a normative condition for `efficiency prices¿, this law has powerful implications for productive efficiency analysis, which have remained unexploited thus far. This paper shows how LoOP-based weight restrictions can be incorporated in Data Envelopment Analysis (DEA). Utilizing the relation between industry-level and firm-level cost efficiency measures, we propose to apply a set of input prices that is common for all firms and that maximizes the cost efficiency of the industry. Our framework allows for firm-specific output weights and for variable returns-to-scale, and preserves the linear programming structure of the standard DEA. We apply the proposed methodology to the evaluation of the research efficiency of economics departments of Dutch Universities. This application shows that the methodology is computationally tractable for practical efficiency analysis, and that it helps in deepening the DEA analysis
Shadow Price Approach to Total Factor Productivity Measurement: With an Application to Finnish Grass-Silage Production
Kuosmanen, T.K. ; Post, T. ; Sipiläinen, T. - \ 2004
Journal of Productivity Analysis 22 (2004)1-2. - ISSN 0895-562X - p. 95 - 121.
fisher ideal indexes - industrialized countries - technical progress - efficiency change - growth - numbers
This paper explores an intermediate route between the Fisher and the Malmquist productivity indexes so as to minimize data requirements and assumptions about economic behavior of production units and their production technology. Assuming quantity data of inputs and outputs and the behavioral hypothesis of allocative efficiency, we calculate the exact value of the Fisher ideal productivity index using implicit shadow prices revealed by the choice of input-output mix. The approach is operationalized by means of a nonparametric data envelopment analysis (DEA) model. Empirical application to Finnish grass silage farms suggests that the Malmquist and the Fisher productivity indices yield similar results when averaged over firms, but there can be major differences in the results of the two approaches at the level of individual firms.