ABSTRACT
This chapter discusses the theory of, and alternative techniques for, measuring efficiency. We first describe the theoretical foundations of efficiency measurement. These foundations are based on the pioneering work of Farrell (1957) and include the theory of production and cost frontiers and their relationship to production and cost functions, and the measurement of technical and allocative efficiency using radial measures of distance to the production/cost frontier. We then go on to describe three alternative approaches to measuring efficiency in the health sector: ordinary least squares (OLS) regression analysis, data envelopment analysis (DEA), and stochastic frontier analysis (SFA).
