The Role of the Reference Technology in Measuring Productive Efficiency

After a twenty year lull, the measurement of productive efficiency is enjoying a revival. In particular, the index of efficiency developed by Debreu (I95i) and later utilised by Farrell (I957) has received considerable attention. These measures have been used fairly extensively in empirical work in both the operations research and economic literature. These types of indexes have also appeared in the growing literature on testing for regularity conditions in production (e.g. in Afriat, I972; Diewert and Parkan, I983; and Varian, 1984). Since the Farrell-type measure is the focus in this paper, a brief review is useful. In the Farrell framework, overall efficiency (OE) can be decomposed into two multiplicative components, allocative efficiency (AE) and technical efficiency (TE);