Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

Abstract: The assumption of a homothetic production function is often maintained in production economics. In this paper we explore the possibility of maintaining homotheticity within a nonparametric DEA framework. The main contribution of this paper is to use the approach suggested by Hanoch and Rothschild in 1972 to define a homothetic reference technology. We focus on the largest subset of data points that is consistent with such a homothetic production function. We use the HR-approach to define a piecewise linear homothetic convex reference technology. We propose this reference technology with the purpose of adding structure to the flexible non-parametric BCC DEA estimator. Motivation for why such additional structure sometimes is warranted is provided. An estimation procedure derived from the BCC-model and from a maintained assumption of homotheticity is proposed. The performance of the estimator is analyzed using simulation.

Keywords: Data Envelopment Analysis (DEA); DEA based estimation of a homothetic production function; linear programming; convex hull estimation; isoquant estimation; polyhedral sets in intersection and sum form

JEL-codes: C00; C40; C60

24 pages, August 14, 2012

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