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Technical Efficiency Measurement by Data Envelopment Analysis

Figure 4 Technical and Allocative Efficiencies

Figure 5 Piecewise Linear Convex Isoquant

These efficiency measures assume the production function of the fully efficient firm is known. In prac-

tice this must be

is not the

case,

estimated

from

and the efficient the sample data.

isoquant Farrell

(1957) suggested piecewise-linear

the use of either (a) a non-parametric convex isoquant constructed such

that no observed point should it (refer to Figure 3), or (b) a

lie to the left or below parametric function be

fitted to the should lie to

data, again such that the left or below it.

no

observed

point

Output-Orientated Measures

The above input-orientated technical efficiency mea- sure addresses the question: “By how much can input quantities be proportionally reduced without chang- ing the output quantities produced?” One could alter- natively ask the question, “By how much can output quantities be proportionally expanded without altering the input quantities used?” This is an output-orientated

Alliance Journal of Business Research

63

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