Relating the CCR Model in Data Envelopment Analysis to Firm Theory Based on the Weak Axiom of Profit Maximization

Abstract

This paper relates the classical Charnes, Cooper and Rhodes' (CCR) model in Data Envelopment Analysis (DEA) to the Weak Axiom of Profit Maximization (WAPM) in Firm Theory. Varian's (1990) firm theory analysis is extended from a single firm to multiple firms. This allows deriving the classical CCR model from the WAPM and provides a behavioral foundation for DEA while establishing a linkage between DEA and economic theory. Efficiency measures for Decision Making Units (DMUs) provided by CCR - are shown to correspond to measurements of deviations from the conditions prescribed by the WAPM. Additionally, the paper establishes a sensitivity theorem (implied by WAPM) showing that DEA efficiency measures never increase as the number of DMUs increases, as had been demonstrated empirically.

Keywords: Data envelopment analysis, productivity analysis, weak axiom of profit maximization, firm theory, economic theory