Firm and Industry Level Profit Efficiency Analysis Under Incomplete Price Data: A Nonparametric Approach Based on Absolute and Uniform Shadow Prices

30 Pages Posted: 2 May 2007

See all articles by Timo Kuosmanen

Timo Kuosmanen

Aalto University School of Business

Mika Kortelainen

University of Joensuu

Timo Sipiläinen

MTT Agrifood Research Institute - Economic Research

L. Cherchye

KU Leuven; Erasmus Research Institute of Management (ERIM)

Date Written: February 2006

Abstract

We discuss the nonparametric approach to profit efficiency analysis at the firm and industry levels in the absence of complete price information, and propose two new insights. First, choosing one commodity (whose price is known) as a numeraire good enables us to measure profit inefficiency in absolute monetary terms. Second, imposing a 'Law of One Price' (LoOP) constraint that all firms should be evaluated in terms of the same input-output prices allows us to aggregate firm-level profit inefficiencies to the overall industry inefficiency. Moreover, the LoOP restrictions increase the discriminatory power of the method by better capturing firm-level allocative inefficiencies. Besides the measurement of profit losses, the presented approach enables one to recover absolute price information from quantity data. We conduct a series of Monte Carlo simulations to study the performance of the proposed approach in controlled production environments.

Keywords: Profit Efficiency, Industry Inefficiency, Data Envelopment Analysis, Absolute Prices, Law of One Price, Weight Restrictions, Simulation

JEL Classification: C14, C61, D21, D24, D61

Suggested Citation

Kuosmanen, Timo and Kortelainen, Mika and Sipiläinen, Timo and Cherchye, Laurens, Firm and Industry Level Profit Efficiency Analysis Under Incomplete Price Data: A Nonparametric Approach Based on Absolute and Uniform Shadow Prices (February 2006). Available at SSRN: https://ssrn.com/abstract=905756 or http://dx.doi.org/10.2139/ssrn.905756

Timo Kuosmanen (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Runeberginkatu 22-24
Helsinki, Finland 00101
Finland

HOME PAGE: http://www.aalto.fi

Mika Kortelainen

University of Joensuu ( email )

Finland

Timo Sipiläinen

MTT Agrifood Research Institute - Economic Research ( email )

Luutnantintie 13
Helsinki
Finland

Laurens Cherchye

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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