Solving the puzzles of structural efficiency

Since the concept of “structural efficiency” first appeared in Farrell [Farrell, M.J., 1957. The measurement of productive efficiency. Journal of the Royal Statistical Society, Series A, Part III 120, 253–281], attempts have been made to derive measures for the performance of a group of production units (often referred to an industry with many firms). Many empirical studies used the technical efficiency of an average unit to measure the structural efficiency of a group, but researchers have been puzzled by the discrepancies between the average of individual efficiency scores and the performance of the group as a whole. In this paper, we point out that the “shadow price model” provides a useful framework for understanding the economic meaning of the structural efficiency as well as its components. By recognizing these components, the puzzles related to the inconsistencies between the individual and group performance can be solved readily.