Title: Arbitrage opportunity estimation: the case of the Cobb-Douglas production function

Authors: Sergey Anokhin; Maxim Bushuev; Elena Akerman; Vladislav Spitsin; Dmitry Anokhin

Addresses: Menlo College, 1000 El Camino Real, Atherton, CA, 94027, USA; School of Engineering Entrepreneurship, Tomsk Polytechnic University, 30 Lenin Ave, Tomsk, 634050, Russia ' Department of Information Science and Systems, Morgan State University, 1700 E Cold Spring Ln, Baltimore, MD, 21251, USA ' School of Engineering Entrepreneurship, Tomsk Polytechnic University, 30 Lenin Ave, Tomsk, 634050, Russia; Department of State and Municipal Administration, Tomsk State University, 36 Lenin Ave, Tomsk, 634050, Russia ' School of Engineering Entrepreneurship, Tomsk Polytechnic University, 30 Lenin Ave, Tomsk, 634050, Russia; Department of Economics, Tomsk State University of Control Systems and Radioelectronics, 40 Lenin Ave, Tomsk, 634050, Russia ' Department of Decision Sciences, The George Washington University, 2201 G St. NW, 20052, Washington, DC, USA

Abstract: The entrepreneurship literature has recently become aware of the phenomenal promise of efficiency evaluation techniques for gauging one of its key concepts - arbitrage opportunities. Unfortunately, the use of DEA, the dominant efficiency evaluation approach, for this purpose is limited by some of the properties of the method. In this paper we develop an alternative method that could be used to assess opportunities for imitation (arbitrage) available to entrepreneurial firms. We adapt the minimum performance inefficiency technique to the Cobb-Douglas production function, compare the new method to the dominant efficiency estimation techniques that could be used to measure arbitrage opportunity, and run a Monte-Carlo experiment to explore its applicability to alternative types of production functions typically tackled with data envelopment analysis. We show that the new method may provide more accurate results than the mainstream approaches, and demonstrate a real-life application of the technique in the publishing industry setting.

Keywords: data envelopment analysis; DEA; minimum performance inefficiency; MPI; entrepreneurship; arbitrage opportunities; Cobb-Douglas.

DOI: 10.1504/IJOR.2024.141326

International Journal of Operational Research, 2024 Vol.51 No.1, pp.38 - 58

Received: 27 Jun 2021
Accepted: 19 Nov 2021
Published online: 09 Sep 2024 *

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