Abstract
As we showed in Chap. 8, by duality, the directional distance function (DDF) is related to a measure of profit inefficiency that is calculated as the normalized deviation between optimal and actual profit at market prices. However, in the most usual case where the selected directional vector corresponds to the observed values in inputs and outputs of the evaluated firm, the associated normalization coincides with the sum of its actual revenue and the actual cost (see expression (8.10)). Although some authors have interpreted this normalization quantity as an indication of the “size” of the firm (see Leleu & Briec, 2009), it is clear that it has no obvious economic meaning from a managerial point of view since this quantity is not present in day-to-day manager’s control panel for decision-making.
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Notes
- 1.
We refer the reader to Sect. 2.6.1 in Chap. 2 for the installation of the “Benchmarking Economic Efficiency” Julia package. All Jupyter notebooks implementing the different economic models in this book can be downloaded from the reference site: http://www.benchmarkingeconomicefficiency.com
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Pastor, J.T., Aparicio, J., Zofío, J.L. (2022). The Modified Directional Distance Function (MDDF): Economic Inefficiency Decompositions. In: Benchmarking Economic Efficiency. International Series in Operations Research & Management Science, vol 315. Springer, Cham. https://doi.org/10.1007/978-3-030-84397-7_11
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