Journal of Productivity Analysis

, Volume 17, Issue 3, pp 183-200

First online:

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

  • Timo KuosmanenAffiliated withDepartment of Social Sciences, Wageningen University
  • , Thierry PostAffiliated withErasmus Research Centre of Management (ERIM) and Department of Finance and Accounting, Erasmus University Rotterdam

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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.

nonparametric efficiency analysis data envelopment analysis performance evaluation under uncertainty stochastic dominance electricity distribution sector