Sponsored by the Department of Finance and Risk Engineering and the Morton L. Topfer Chair Lecture Series
Benchmarking is formalized by a linear program that determines the efficiency of a firm relative to its peers and is used to determine the efficiency of an industry. The overall efficiency is shown to be underestimated by mean firm efficiency and the bias is zero if and only if the firm shadow prices of the inputs and outputs generated by the benchmarking programs are equal across firms. Otherwise the bias provides an efficiency measure for the organization of the industry. A main contribution of this paper is the interrelation of productivity analysis and the theory of industrial organization. An analysis of the Japanese banking industry is used to illustrate.