LINEAR INPUT AGGREGATION BIAS IN NONPARAMETRIC TECHNICAL EFFICIENCY MEASUREMENT

An attraction of the nonparametric approach to measuring technical eff iciency is that no a priori structure is placed on the production proc ess of the firm. However, inputs are typically linearly aggregated, ei ther explicitly or implicitly. It is shown that this introduces bias i n the technical efficiency measurement. The computed technical efficie ncy measure becomes an economic efficiency measure comprised of both t echnical and allocative efficiency. An empirical application demonstra tes the bias.