Measuring Eco-Inefficiency: A New Frontier Approach

Growing social concerns over the environmental externalities associated with business activities are pushing firms to identify activities that create economic value with less environmental impact and to become more eco-efficient. Over the past two decades, researchers have increasingly used frontier efficiency models to evaluate productive efficiency in the presence of undesirable outputs, such as greenhouse gas emissions or toxic emissions. In this paper, we identify critical flaws in existing frontier models and show that these models can identify eco-inefficient firms as eco-efficient. We develop a new eco-inefficiency frontier model that rectifies these problems. Our model calculates an eco-inefficiency score for each firm and improvements in outputs necessary to attain eco-efficiency. We demonstrate through a Monte Carlo experiment that our eco-inefficiency model provides a more reliable measurement of corporate eco-inefficiency than the existing frontier models. We also extend the single-output Cobb-Douglas production function to multiple desirable and undesirable outputs. This extension allows for greater flexibility in the simulation analysis of frontier models.