Dynamics of Efficiency

Dynamisation of efficiency in data envelopment analysis may be viewed in several forms, depending on the interpretation of efficiency. Four different interpretations have been discussed in the current literature. One is the economic theory of technical efficiency and allocative (price) efficiency, where the former characterizes a production frontier and the latter the degree of correctness in adaptation of factor proportions to the ratio of factor prices. When the factor prices are observed as competitive market prices, the allocatively efficient firms follow an expansion path which is optimal in each period. This optimal expansion path may be called the expansion frontier. A second view is to consider the production function underlying the DEA models with dynamic inputs such as capital, technology and capacity variables, each of which has significant impact on output for several periods in the future. Efficiency in this framework is characterized by the capacity frontier or the technology frontier. The third form of efficiency defines an adjustment frontier as in model (3.l0c) of Chapter One, where the coefficients of the production frontier are modified due to various time lags of adjustment of inputs. This type of model allows a two-stage interpretation of efficiency, with a short and a long run view of the state space model.