A Comparative Application of Data Envelopment Analysis and Frontier Translog Production Function for Estimating Returns to Scale and Efficiencies

Abstract

This paper critically analyses, in the context of classical and neoclassical perspectives, the concepts of ‘returns to scale’ and ‘economies of scale’ by relating the former to the concept of ‘production unit’ and the latter to the concept of ‘firm’, and concludes that returns to scale constitutes only one component of economies of scale. The estimation models of frontier translog production function and DEA are applied to data on the Indian steel industry for a period of eight years in order to compare inferences about the production correspondence of the steel industry. Our results indicate that DEA is advantageous over the translog method in providing information relating to returns to scale possibilities of each of the individual production units. With regards to the efficiency evaluation, both the models are found to give statistically significant ‘technical’ and ‘technical and scale’ efficiency ratings.

Keywords: Returns to scale, Economies of scale, DEA, Translog production function, Indian steel industry

JEL Classification: D24, C61