A Novel Model of Costly Technical Efficiency

Tsionas, Mike and Izzeldin, Marwan (2018) A Novel Model of Costly Technical Efficiency. European Journal of Operational Research, 268 (2). pp. 653-664. ISSN 0377-2217

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Abstract

This paper presents a novel model of measuring technical inefficiency based on the notion that higher efficiency requires a certain cost. First, we apply the “rational inefficiency hypothesis” of Bogetoft and Hougaard (2003) but we fail to find that it rationalizes our data set of large U.S banks with multiple inputs and outputs. In consequence, we adopt a novel model of profit maximization which explicitly incorporates the cost of technical inefficiency. The cost of inefficiency is treated as unknown and is parametrized as a function of inputs, outputs and decision-making-unit specific fixed effects. More importantly, by showing the model to be equivalent to one in which inefficiency is an arbitrary function of inputs, outputs and the inefficiency cost, we are able to determine optimal directions in the input-output space that would reduce inefficiency. Bayesian techniques organized around Markov Chain Monte Carlo are used to perform the computations and provide statistical inferences as well as useful policy measures to reduce inefficiencies in the U.S banking sector through an examination of different realistic scenarios.

Item Type:
Journal Article
Journal or Publication Title:
European Journal of Operational Research
Additional Information:
This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 268, (2), 2018 DOI: 10.1016/j.ejor.2018.01.016
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1800/1802
Subjects:
ID Code:
123563
Deposited By:
Deposited On:
22 Feb 2018 15:06
Refereed?:
Yes
Published?:
Published
Last Modified:
19 Sep 2020 05:03