Productivity Measurement from a Reference Technology: A Distance Function Approach

An approach to productivity measurement based on distance function measurement is developed in this paper. A series of reference technologies are constructed by augmenting observed inputs and outputs such that the resulting effective netputs are consistent with the weak axiom of profit maximization. Geometric means of year-ahead and year-back distance function values serve as measures of multifactor productivity changes. Both primal measures from the inner bound and dual measures from the outer bound of the reference technologies are calculated. Resulting productivity measures are similar to those derived using index number approaches, but potentially provide greater information regarding the reference technologies.