Measuring and decomposing profit inefficiency through the Slacks-Based Measure

The Slacks-Based Measure was introduced by Tone (2001) in order to estimate technical efficiency in the input-output space by taking into account all sources of technical inefficiency and satisfying, at the same time, many interesting properties. Since then, the Slacks-Based Measure has attracted the interest of numerous researchers and practitioners. The Slacks-Based Measure has been applied to technical efficiency determination, productivity change measurement, the analysis of production process performance consisting of networks, and so on. However, so far, the Slacks-Based Measure has not been directly related to profit inefficiency as a component of the overall economic performance of firms. In this note, we show how a specific normalized measure of profit inefficiency may be decomposed through the Slacks-Based Measure.