Dynamic Efficiency Measurement: A Directional Distance Function Approach

Abstract

A dynamic directional input distance function is proposed within the adjustment-cost model of the firm, generalizing the directional distance function developed by Chambers, Chung and Färe (1996) in the static context. Duality is established between the dynamic directional distance function and the optimal current value function of the intertemporal cost minimization problem. Dynamic input efficiency measures are generated from the dynamic directional input distance function and intertemporal duality. These efficiency measures indicate the firm’s degree of efficiency at a point along its adjustment path. The dynamic efficiency measures are illustrated on panel data of Dutch glasshouse horticulture firms using a nonparametric approach. Keywords and Phrases: adjustment-cost technology, dynamic directional input distance function, dynamic duality, dynamic cost efficiency.