Productivity Interpretations of the Farrell Efficiency Measures and the Malmquist Index and its Decomposition
Finn R. Førsund
The ratio definition of efficiency has the form of a productivity measure. But the weights are endogenous variables and they do not function as weights in a productivity index proper. It is shown that extended Farrell measures of efficiency can all be given an interpretation as productivity measures as observed productivity relative to productivity at the various projection points on the frontier.The Malmquist productivity index is the efficiency score for a unit in a period relative to the efficiency score in a previous period, thus based on a maximal common expansion factor for outputs or common contraction factor for inputs not involving any individual weighting of outputs or inputs, as is the case if a Törnqvist or ideal Fisher index are used. The multiplicative decomposition of the Malmquist productivity index into an efficiency part and a frontier shift part should not be taken to imply causality.