Measuring technical efficiency

The theoretical consideration of technical efficiency has existed since Koopmans defined it as production possibilities for which it is not possible to increase any output without simultaneously increasing any input, ceteris paribus. The non-parametric approach to efficiency calculation known as Data Envelopment Analysis is not based on this definition but rather on the radial index of Farrell. Even after Farrell efficiency is achieved there may exist additional slack in individual inputs and/or outputs, implying that Farrell's index does not necessarily measure Koopmans inefficiency. Various measures have been proposed to solve this problem. This paper discusses shortcomings of these alternative measures and introduces a new relative measure of technical efficiency. Using simulated data, it is shown that the new measure outperforms existing measures in the majority of cases.