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Data Envelopment Analysis

Data Envelopment Analysis (DEA) is a non-parametric method for assessing economic efficiency by estimating a piecewise linear efficient frontier using linear programming. It distinguishes between technical, allocative, and economic efficiency, and can be oriented towards input or output measures. While DEA is easy to implement and provides valuable insights, it has drawbacks such as sensitivity to extreme points and the assumption of no errors in the data.

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3 views

Data Envelopment Analysis

Data Envelopment Analysis (DEA) is a non-parametric method for assessing economic efficiency by estimating a piecewise linear efficient frontier using linear programming. It distinguishes between technical, allocative, and economic efficiency, and can be oriented towards input or output measures. While DEA is easy to implement and provides valuable insights, it has drawbacks such as sensitivity to extreme points and the assumption of no errors in the data.

Uploaded by

maram houas
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Data Envelopment Analysis (DEA): an optimization approach for

benchmarking and performance analysis

Efficient frontier:

 Farrell (1957), building on Debreu (1951) and Koopmans (1951),


proposed a measure of firm efficiency.
 This measure can be applied to multi-output cases
 Efficient frontier represents the best combination of inputs to
produce a given output.
 Farrell introduced two methods for defining the efficient frontier:
o A stochastic method using a predefined production function.
o A linear programming method for defining a piecewise linear
frontier.
 Parametric approach: Estimates a function, like the Cobb-Douglas
function, to fit the data.
 Non-Parametric approach: Uses a piecewise linear convex frontier
to fit the data.
 Data Envelopment Analysis (DEA): Used to estimate the
piecewise linear efficient frontier by finding a convex envelope for
the data.

Efficiency as defined by Farrell and afriat:

 Technical efficiency: The ability of a firm to obtain maximal output


from a given set of inputs.
 Allocative efficiency: the ability of a firm to use the inputs in the
optimal proportions given their respective prices.
 Economic efficiency: the combination of the two previous form of
efficiency

Technical and allocative efficiency:


Data Envelopment Analysis:

 Is a non-parametric method for analysing economic efficiency


 Unlike parametric methods, it does not assume a specific functional
form for the production function.
 DEA uses linear programming to determine a piecewise linear
efficient frontier
 It calculates efficiency coefficients and sets efficient benchmarks for
economic units.
 The methodology became widely recognized after the 1978 paper by
Charnes, Cooper, and Rhodes, which introduced DEA as a method for
efficiency analysis (P87)

Input/output orientation and returns to scale:

 Input oriented measure: How much can input quantities be


reduced without changing output quantities?
 Output-oriented measure: How much can output quantities be
increased without altering input quantities?
 Constant Return to Scale (CRS): Proportional increase, regardless
of quantity.
 Variable Return to Scale (VRS): Non-proportional change
between inputs and outputs, with increasing or decreasing returns to
scale.

Advantages:

 Easy to implement
 Important information can be obtained:
- Efficient frontier
- Peer group
- Efficient target for inefficient DMUs

Drawbacks:

 Assumes that there is no error so not stochastic


 An extreme point analysis
 High sensitivity to extreme points.

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