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Advances in Decision Sciences
Volume 2012 (2012), Article ID 731497, 11 pages
http://dx.doi.org/10.1155/2012/731497
Research Article

Directional Distance Functions and Rate-of-Return Regulation

Center of Operations Research (CIO), University Miguel Hernandez of Elche, Alicante, 03202 Elche, Spain

Received 7 April 2012; Accepted 14 May 2012

Academic Editor: Henry Schellhorn

Copyright © 2012 Juan Aparicio and Jesus T. Pastor. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper is concerned with formulating directional distance functions assuming that firms operate subject to rate-of-return regulation. To this end, we consider two different contexts. First, we assume that input prices are known, which allows us to extend the rate of return regulated version of Farrell efficiency. Secondly, we assume that input prices are unknown, showing then that a specific reference direction arises as a natural choice for measuring efficiency with directional distance functions.