“The Nature of Scale efficiency and Its Interpretation”

Sung Ko Li, Hong Kong Baptist University

Scale efficiency is widely used in production analysis. The interpretation of scale efficiency scores is either ambiguous or inappropriate. This paper revisits the economic nature of scale efficiency and the empirical interpretation of its scores. Using a Malmquist productivity index, we demonstrate that scale efficiency measures the productivity difference between a technically efficient point and the scale efficient point. Furthermore, we show that scale efficiency needs not be consistent with profit maximization and thus should not be included in analyzing the performance of individual firms.