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Abstract
Introduction
Some Important Special Cases
Conclusion
References
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Mathematics
Applied Mathematics

A Unifying Framework for Farrell Profit Efficiency Measurement

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2019, Operations Research

https://doi.org/10.1287/OPRE.2018.1770
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Abstract

Measuring profit efficiency is a challenging task, and many different approaches have been suggested. This paper synthesizes existing approaches and develops a general Farrelltype 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.

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