Multi-Output Profit Efficiency and Directional Distance Functions
KU Leuven Center for Economic Studies Discussion Paper Series DPS14.32
24 Pages Posted: 14 Nov 2014
Date Written: November 7, 2014
We extend a recently developed DEA methodology for cost efficiency analysis towards profit efficiency settings. This establishes a novel DEA toolkit for profit efficiency assessments in situations with multiple inputs and multiple outputs. A distinguishing feature of our methodology is that it assumes output-specific production technologies. In addition, the methodology accounts for the use of joint inputs, and explicitly includes information on the allocation of inputs to individual outputs. We also establish a dual relationship between our multi-output profit inefficiency measure and a technical inefficiency measure that takes the form of a multi-output directional distance function. Finally, we demonstrate the empirical usefulness of our methodology by an empirical application to a large service company.
Keywords: DEA, multiple outputs, profit efficiency, joint inputs, output-specific inputs, directional distance function
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