A new value-based method for decomposing profit efficiency

Abstract

Conventional profit and allocative efficiencies suffer from a critical deficiency if input and output prices are different between decision-making units (DMUs) in the market when assuming given uniform input and output prices under a homogeneous technology. Price differences and technology gap considerations are more relevant to firms in reducing profit loss under a non-homogeneous technology with non-perfect market competition. This study proposes a new value-based meta-profit inefficiency decomposition considering the presence of both a new technology gap and price inefficiency. As an illustrative empirical application, we present an example of 35 Taiwanese banks representing two types of banking organizations: financial holding companies (FHCs) and non-FHCs. The new decomposition we propose helps to identify the profit-loss due to group technical, group price, new technology gap and meta-mix inefficiencies of DMUs.