A Theoretical And Empirical Study On Cost Efficiency Under Nonparametric Method

Either profitable producer or non-profitable producer pursues production under the lowest cost. And they want a cost-efficient production. Based on the work of domestic and oversea scholars, this paper conducts a comprehensive and systematic research on cost efficiency using nonparametric method. Both theoretical and empirical studies are made. The main works and innovations are as follows:1. FGL Cost Efficiency Model is enriched. Inputs are categorized into homogeneous one and non-homogeneous one. With the homogeneous one, the concepts of market efficiency and overall cost efficiency are given and overall cost efficiency model is provided. With the non-homogeneous one, the model's production probability set is the cost-base one.2. Decision maker would pay more attention to those DMUs who are cost inefficient during cost efficiency evaluation. Some cost-inefficient DMUs can be found before FGL cost efficiency evaluation under known price information. Hence cost efficiency evaluation process can be simplified. This paper introduces the concept of how to verify those DMUs which are cost inefficient in advance and verifies relevant four theorems. Also the corresponding methods and steps are provided3. This paper introduces Returns to Scale to cost-inefficiency analysis. And factors for cost inefficiency are added to three ones. Then the three factors are explained from classical economy theories. Thus the function, that analysis result of cost efficiency guide production, is promoted. Based on the above, three models are established for cost inefficiency analysis, which are CRS-P model, VRS-D model, and CRS/VRS model.4. This paper also discusses cost efficiency evaluation under fixed inputs. There are two methods to cost computation: total cost method and variable cost method. The paper analyses advantages and disadvantage of the two methods and provides conditions under which each can be used. Fixed cost should be excluded when conducting cost efficiency evaluation under cost reduction by inputs reduction. Cost efficiency model under fixed cost is established. And cost efficiency and allocation efficiency are redefined.5. Cost efficiency evaluation under uncertain price information is also under discussion. The paper puts forward the optimistic cost efficiency model as well as the pessimistic cost efficiency model.6. An empirical study is given under banking industry to illustrate main theories and models of this paper. The empirical study shows that using theories of the paper, one can not only find which DMUs are cost efficient, but also find the factors which lead to cost inefficiency of DMUs.