Arbitrage opportunity estimation: the case of the Cobb-Douglas production function
by Sergey Anokhin; Maxim Bushuev; Elena Akerman; Vladislav Spitsin; Dmitry Anokhin
International Journal of Operational Research (IJOR), Vol. 51, No. 1, 2024

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.

Online publication date: Mon, 09-Sep-2024

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