Developing a decomposable measure of profit efficiency using DEA

Portela, M.C.A.S. and Thanassoulis, Emmanuel (2007). Developing a decomposable measure of profit efficiency using DEA. Journal of the Operational Research Society, 58 (4), pp. 481-490.


In for-profit organizations efficiency measurement with reference to the potential for profit augmentation is particularly important as is its decomposition into technical, and allocative components. Different profit efficiency approaches can be found in the literature to measure and decompose overall profit efficiency. In this paper, we highlight some problems within existing approaches and propose a new measure of profit efficiency based on a geometric mean of input/output adjustments needed for maximizing profits. Overall profit efficiency is calculated through this efficiency measure and is decomposed into its technical and allocative components. Technical efficiency is calculated based on a non-oriented geometric distance function (GDF) that is able to incorporate all the sources of inefficiency, while allocative efficiency is retrieved residually. We also define a measure of profitability efficiency which complements profit efficiency in that it makes it possible to retrieve the scale efficiency of a unit as a component of its profitability efficiency. In addition, the measure of profitability efficiency allows for a dual profitability interpretation of the GDF measure of technical efficiency. The concepts introduced in the paper are illustrated using a numerical example.

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Divisions: Aston Business School > Operations & information management
Aston Business School > Operations & information management research group
Uncontrolled Keywords: data envelopment analysis,decomposition,profit efficiency,Management of Technology and Innovation,Strategy and Management,Management Science and Operations Research
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Published Date: 2007-04
Authors: Portela, M.C.A.S.
Thanassoulis, Emmanuel ( 0000-0002-3769-5374)

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