Duality Theory of Non-convex Technologies

Duality Theory of production imposes a number of simplifying assumptions regarding the production technology, including various maintained convexity assumptions. Emphasizing the technological information content of alternative models, this paper challenges some widely held views on the role of convexity. The role of convexity in Duality Theory is asymmetric. While convexity is of importance in recovering technology information from economic models, cost functions are concave and profit functions are convex irrespective of convexity of the underlying technology. For recovering technology information from economic models and data, we discuss two alternative approaches: recovering inexact outer-bound approximations; and enriching standard economic models by additional quantity/financial constraints. The main conclusion is that non-convexities should not stop one from applying the Duality Theory.