Decomposing technical efficiency and scale elasticity in two-stage network DEA |
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Authors: | Biresh K. Sahoo Joe Zhu Kaoru Tone Bernhard M. Klemen |
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Affiliation: | 1. Xavier Institute of Management, Bhubaneswar 751 013, India;2. School of Business, Worcester Polytechnic Institute, Worcester, MA 01609, USA;3. National Graduate Institute for Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo 106-8677, Japan;4. Morgan Stanley, Investment Banking Division, 20 Bank Street, London E14 4AD, UK |
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Abstract: | The constant returns to scale assumption maintained by neoclassical theorists for justifying the black-box structure of production technology in long run does not necessarily allow one to infer that there are no scale benefits available in its sub-technologies. Most of real-life production technologies are multi-stage in nature, and the sources of increasing returns lie in the sub-technologies. It is, therefore, imperative to estimate the scale economies of a firm not only for the network technology but also for the sub-technologies. To accomplish this, two approaches are suggested in this contribution, based on the premise concerning whether a network technology construct considers allocative inefficiency. The first approach, which is ours, makes use of a single network technology for two interdependent sub-technologies. The second approach, which is due to Kao and Hwang (2011), however, assumes complete allocative efficiency by considering two independent sub-technology frontiers, one for each sub-technology. The distinction between these two approaches is important from a policy point of view since the network efficiencies revealed from these two approaches have distinctive causative factors that do not permit them to be used interchangeably. |
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Keywords: | Data envelopment analysis Network DEA Returns to scale Scale elasticity decomposition Technical efficiency decomposition |
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