Multi-criteria production theory: foundation of non-financial and sustainability performance evaluation

Abstract

Multi-criteria production theory (MCPT) is a generalization of traditional production theories which has been developed in order to integrate concerns of modern management science and economics, in particular sustainability and environmental protection. Such as traditional production theory lays a foundation for cost (and revenue) theory, MCPT can be utilized to expand the knowledge regarding the theory and practice of non-financial performance evaluation, which is of major importance with distinct, conflicting objectives. Based on decision theory, the main idea behind MCPT is the capability to distinguish technologically determined inputs and outputs of a production system’s activity from its desired or undesired impacts on (artificial or natural) environments. The idea is formalized by multiple value functions. The paper clarifies the basic assumptions of MCPT in comparison to those of traditional production theories. For the special cases of linear and of monotonic value functions, two main theorems of MCPT are proven. Their application provides fruitful insights into some procedures and pitfalls of non-financial performance evaluation, especially those regarding ecological economics and data envelopment analysis. The main topics that are discussed address undesirable products and factors, hierarchies of performance evaluations, problems of non-monotonic value functions as well as the rationality of ‘technically inefficient’ production.