Cost efficiency in data envelopment analysis under the law of one price |
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Authors: | Lei Fang Hecheng Li |
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Institution: | 1. Business School, Nankai University, People’s Republic of China;2. Department of Mathematics, Qinghai Normal University, People’s Republic of China |
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Abstract: | To impose the law of one price (LoOP) restrictions, which state that all firms face the same input prices, Kuosmanen, Cherchye, and Sipiläinen (2006) developed the top-down and bottom-up approaches to maximizing the industry-level cost efficiency. However, the optimal input shadow prices generated by the above approaches need not be unique, which influences the distribution of the efficiency indices at the individual firm level. To solve this problem, in this paper, we developed a pair of two-level mathematical programming models to calculate the upper and lower bounds of cost efficiency for each firm in the case of non-unique LoOP prices while keeping the industry cost efficiency optimal. Furthermore, a base-enumerating algorithm is proposed to solve the lower bound models of the cost efficiency measure, which are bi-level linear programs and NP-hard problems. Lastly, a numerical example is used to demonstrate the proposed approach. |
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Keywords: | Data envelopment analysis Law of one price Cost efficiency |
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