Frontier Visualization and Estimation of Returns to Scale in Free Disposal Hull Models

Abstract

The free disposal hull (FDH) model of production technology assumes free disposability of all inputs and outputs, but does not make any convexity assumptions. In this paper, we develop an algorithm for the reconstruction of the frontier of the FDH technology that corresponds to its sections by different two-dimensional planes. From a practical perspective, the suggested algorithm is useful for the visualization and exploration of the efficient frontier of the FDH technology. Furthermore, based on the suggested algorithm, we develop a new procedure for the evaluation of returns to scale in the FDH technology. Compared to the existing methods, our approach does not require assessing the efficiency of productive units in the reference technologies, which is known to be a computationally intensive task. Our theoretical results are confirmed by computational experiments in applications with real-life data sets from different industries.