Productivity and Efficiency Analysis

Abstract

Productivity and economic efficiency analysis has entered a new phase, since the data envelopment analysis (DEA) introduced a nonparametric method of measuring technical and allocative efficiency. The DEA efficiency models have three most interesting features, which have fostered numerous applications in several disciplines, for example, microeconomics, operations research, and econometrics. The first feature is the specification and estimation of a multi-output multi-input production frontier, which can be estimated without any price information. Second, the production frontiers can be estimated for public sector decision making units (DMUs) with observed input and output data only and every DMU can be compared in terms of its relative efficiency in respect of the whole group comprising all DMUs. Third, if the market data in the form of output and input prices are available, then the DEA model can be used to compute overall cost efficiency and allocative efficiency. Thus a cost frontier can be estimated along with a productive frontier. In a cost frontier, output technical inefficiency indicates the amount by which a firm or DMU can increase output, holding cost constant and input technical inefficiency captures the amount by which a firm can reduce costs, holding output constant.