Data Envelopment Analysis as a Complement to Marginal Analysis

The consideration in the present study is mainly conceptual. The objective is to show how Data Envelopment Analysis (DEA) can be used to reveal the true input-output relations in an industry. In the estimation of a production function it is assumed that all firms use the existing technology efficiently. However, in the real world the observed firms produce homogeneous outputs with differences in factor intensities and in managerial capacity. Hence, inefficiencies are hidden in the estimated production functions. In order to overcome this drawback of the parametric approach and to reveal the true nature of the input-output relations in production, given the available technology, the DEA approach is applied. In this study DEA is applied in order to select the farms that utilize efficiently the existing technology, allowing the estimation of a production function that reveals the true input-output relations in sheep-goat farming, using farm accounting data from a sample of 108 sheep-goat farms.