Decomposing Technical Inefficiency Using the Principle of Least Action

European Journal of Operational Research 239(3), 2014

Posted: 1 Jul 2014

See all articles by Juan Aparicio

Juan Aparicio

University Miguel Hernandez - Center of Operations Research

Bernhard Mahlberg

Institute for Industrial Research (IWI); Vienna University of Economics and Business - Institute for Production Management

Jesús T. Pastor

Miguel Hernandez University

Biresh Sahoo

Xavier Institute of Management

Date Written: June 28, 2014

Abstract

In for-profit organizations, profit efficiency decomposition is considered important since estimates on profit drivers are of practical use to managers in their decision making. Profit efficiency is traditionally due to two sources - technical efficiency and allocative efficiency. The contribution of this paper is a novel decomposition of technical efficiency that could be more practical to use if the firm under evaluation really wants to achieve technical efficiency as soon as possible. For this purpose, we show how a new version of the Measure of Inefficiency Proportions (MIP), which seeks the minimization of the total technical effort by the assessed firm, is a lower bound of the value of technical inefficiency associated with the directional distance function. The targets provided by the new MIP could be beneficial for firms since it specifies how firms may become technically efficient simply by decreasing one input or increasing one output, suggesting that each firm should focus its effort on a specific dimension (input or output). This approach is operationalized in a data envelopment analysis framework and applied to a dataset of airlines.

Keywords: Data envelopment analysis, Technical efficiency decomposition, Closest targets

JEL Classification: C44, C61, C63, L93

Suggested Citation

Aparicio, Juan and Mahlberg, Bernhard and Pastor Ciurana, Jesús Tadeo and Sahoo, Biresh K., Decomposing Technical Inefficiency Using the Principle of Least Action (June 28, 2014). European Journal of Operational Research 239(3), 2014. Available at SSRN: https://ssrn.com/abstract=2460627

Juan Aparicio (Contact Author)

University Miguel Hernandez - Center of Operations Research ( email )

Instituto CIO
Av. de la Universidad s/n.
Elche (Alicante), Alicante 03202
Spain

Bernhard Mahlberg

Institute for Industrial Research (IWI) ( email )

Mittersteig 10/4
Vienna, 1050
Austria
+43 1 513 44 11 0 (Phone)
+43 1 513 44 11 2099 (Fax)

HOME PAGE: http://www.iwi.ac.at/

Vienna University of Economics and Business - Institute for Production Management ( email )

Welthandelsplatz 1
Building D2, Entrance C, 3rd floor
Vienna, 1020
Austria
+43 1 313 36 - 5615 (Phone)

HOME PAGE: http://https://www.wu.ac.at/en/prodmanengl/

Jesús Tadeo Pastor Ciurana

Miguel Hernandez University ( email )

Elche Campus, La Galia Building
Avda. del Ferrocarril, s/n
03202 Elche
Spain
+34 96-665-8621 (Phone)
+34 96-665-8715 (Fax)

HOME PAGE: http://www.umh.es/frame.asp?url=/busquedas/resultados.asp?qu=Jesus%20T.%20Pastor

Biresh K. Sahoo

Xavier Institute of Management ( email )

Xavier Square
Bhubaneswar, 751 013
India
+91 674 6647 735 (Phone)

HOME PAGE: http://hib.xub.edu.in/Hibiscus/Pub/faccvDet.php?client=xu&facid=XF325

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