Lerner Index, Productive Efficiency and Homotheticity

Abstract

Chambers et al . (2014) set forth a decomposition of the Lerner index, which results in a function on the full space o f input and output prices and quantities, such that the effect of the Farrell output measure of technical efficiency is explicit. In close correspondence, a decomposition of the Lerner index is established in which allocative efficiency (in both standard and reversed form, as defined by Bogetoft et al ., 2006) complements the effect of input technical efficiency, with the reversed decomposition bound to the hypothesis of homotheticity. The resulting functions on are conjectured to define pregnant perspectives on the benchmark relevance of homothetic models, and their generalizations to multiple output.