Decomposing Technical Inefficiency Using the Principle of Least Action
European Journal of Operational Research 239(3), 2014
Posted: 1 Jul 2014
Date Written: June 28, 2014
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
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