Non-radial profit performance: An application to Taiwanese banks

This research modifies the directional Russell measure (DRM) of Fukuyama and Weber (2009) [1] to decompose the Nerlovian profit efficiency in Chambers et al. (1998) [2] so as to obtain a generalized measure that completely excludes technical inefficiency from allocative inefficiency. Based on such a decomposition, we further develop a new slack-based and profit-oriented productivity indicator, combining the Nerlovian profit measure with the conventional Luenberger productivity indicator (LPI), in order to provide a full picture of the sources of productivity change. Productivity change, based on the profit boundary, is decomposed into four components: the change in technical efficiency; the change in allocative efficiency; the shift of technology; and the price effect from outputs and inputs. This decomposition provides a more complete picture of the sources of productivity change. The above indicator is used herein to measure the productivity change of Taiwanese banks in terms of profit.