On structural and average technical efficiency
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In this paper we explain the discrepancy between the efficiency of the average production unit and average efficiency by means of a covariance term relating size and technical efficiency and the extent of reallocation inefficiency. We show that, regardless of the degree of reallocation efficiency, the efficiency of the average production unit is lower than average efficiency when either size and efficiency are uncorrelated or larger units are more efficient than smaller ones. If however larger units are less efficient than smaller ones, the efficiency of the average production unit is higher than average efficiency as long as reallocation efficiency prevails. In addition, reallocation efficiency and a zero covariance term are sufficient conditions for the efficiency of the average production unit to be equal to average efficiency.
KeywordsStructural efficiency Industry efficiency Average production unit
JEL ClassificationD21 D24
This paper was presented at the Conference in Memory of Professor Lennart Hjalmarsson, hold at Gothenburg, Sweden, Dec. 7–8, 2012. I would like to thank session participants for a constructive and stimulating discussion. Rolf Färe as always provided inspired comments and suggestions. Svante Ylvinger supplied several related materials and Finn Førsund gave useful guidelines that both help me in revising the paper. Last but not least, the paper has benefited of valuable comments from two anonymous referees of this journal.
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