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Nonparametric Efficiency Analysis under Price Uncertainty: A First-Order Stochastic Dominance Approach

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Abstract

This paper extends the nonparametric approach to efficiency analysis to deal with uncertainty of input-output prices. We generalize the notion of economic efficiency to derive necessary and sufficient first-order stochastic dominance (FSD) efficiency conditions. Interestingly, the FSD conditions include as limiting cases the traditional conditions for economic efficiency and technical efficiency. Furthermore, we propose empirical tests for these FSD conditions, which require minimal assumptions concerning the preferences of the decision-maker and the statistical distribution of the prices. From operational point of view, the FSD conditions can be tested empirically using standard mathematical programming techniques. An empirical application to the Dutch electricity distribution sector illustrates the approach.

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Authors and Affiliations

  1. Department of Social Sciences, Wageningen University, P.O. Box 8130, 6700 EW, Wageningen, The Netherlands

    Timo Kuosmanen

  2. Erasmus Research Centre of Management (ERIM) and Department of Finance and Accounting, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands

    Thierry Post

Authors
  1. Timo Kuosmanen
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  2. Thierry Post
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Kuosmanen, T., Post, T. Nonparametric Efficiency Analysis under Price Uncertainty: A First-Order Stochastic Dominance Approach. Journal of Productivity Analysis 17, 183–200 (2002). https://doi.org/10.1023/A:1015037719942

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