A unifying framework for structural efficiency measurement: Theories and applications = 結構效率測量的統一框架:理論與應用

Project title
A unifying framework for structural efficiency measurement: Theories and applications = 結構效率測量的統一框架:理論與應用
Principal Investigator
Grant Awarding Body
Research Grants Council
Grant Type
Faculty Development Scheme
Project Code
Amount awarded
Funding Year
Duration of the Project
24 months
Efficiency is key leverage for sustaining the profitability of individual firms and industry, and in managing resource allocation within and across economic regions. The term “efficiency” represents the current performance of a production unit compared to the best that production unit can perform. The term “inefficiency” means a production unit is not performing at the best that it can perform. Industry applications of the current literature focus mainly on individual efficiency, not the efficiency of the whole group. This proposed project, therefore, aims to develop an unified framework for measuring group efficiency (structural efficiency), which can be decomposed into four exhaustive and mutually exclusive components: (i) efficiency in the internal utilization of inputs within individual production units (aggregate technical efficiency), (ii) efficiency in the combination of outputs within individual production units (aggregate allocative efficiency), (iii) efficiency in resource allocation within subgroups (intragroup re-allocative efficiency), and (iv) efficiency in resource allocation among subgroups (intergroup re-allocative efficiency).

Identifying the main source of inefficiency of a group informs decision makers on the correct measures necessary to eliminate inefficient production. However, there is ample room for improvement in measuring the efficiency of a group under different scenarios. For example, (i) a centralized decision maker should aim at minimizing inputs with the policy targeted amount of service (output) provided in the public sector, and so the traditional methods that assume maximizing output objective may lead to irrelevant policy implications; (ii) technologies and prices in different regions are heterogeneous, assuming the same technology and prices when making the resource allocation decision among regions may cause biased flows of resources in favour of regions with better technologies; and (iii) in business management, there are inputs that are fixed within the contract period, e.g., rental costs. Ignoring the constraint that non-re-allocatable inputs in strategic planning may mislead managers to formulate unattainable production targets. In this study, our proposed model for structural efficiency measurement with subgroups incorporates all four of the above missing elements among the existing models in the literature. This proposed unifying framework integrates different prices, varying production objectives (different orientations), heterogeneous production technologies, and immoveable (fixed) inputs into the general model.

We will apply this new framework to several empirical case studies: (i) the public sector – the Hong Kong public hospital sector, which has a policy target of service output; (ii) regional economies in mainland China, which feature heterogeneous technologies and prices; and (iii) the catering industry in Hong Kong, which functions with fixed inputs. For academic researchers, this new framework will reveal the aforementioned missing elements of the performance measurements of a group of production units in the current literature. For practitioners, additional policy implications unavailable in existing methods would be exposed. Further, government officials and business practitioners will be better informed to make superior strategic performance improvement decisions.