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Inferring the Latent Incidence of Inefficiency from DEA Estimates and Bayesian Priors

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Author Info
Daniel Friesner
Ron Mittelhammer
Robert Rosenman () (School of Economic Sciences, Washington State University)
Abstract

Data envelopment analysis (DEA) is among the most popular empirical tools for measuring cost and productive efficiency. Because DEA is a linear programming technique, establishing formal statistical properties for outcomes is difficult. We show that the incidence of inefficiency within a population of Decision Making Units (DMUs) is a latent variable, with DEA outcomes providing only noisy sample-based categorizations of inefficiency. We then use a Bayesian approach to infer an appropriate posterior distribution for the incidence of inefficient DMUs based on a random sample of DEA outcomes and a prior distribution on the incidence of inefficiency. The methodology applies to both finite and infinite populations, and to sampling DMUs with and without replacement, and accounts for the noise in the DEA characterization of inefficiency within a coherent Bayesian approach to the problem. The result is an appropriately up-scaled, noise-adjusted inference regarding the incidence of inefficiency in a population of DMUs.

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File URL: http://www.ses.wsu.edu/PDFFiles/WorkingPapers/WP_2006-8-Friesner.pdf
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Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2006-8.

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Length: 43 pages
Date of creation: Aug 2006
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Handle: RePEc:wsu:wpaper:friesner-1

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Related research
Keywords: Data Envelopment Analysis; latent inefficiency; Bayesian inference; Beta priors; posterior incidence of inefficiency;

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Chirikos, Thomas N. & Sear, Alan M., 1994. "Technical efficiency and the competitive behavior of hospitals," Socio-Economic Planning Sciences, Elsevier, vol. 28(4), pages 219-227, December. [Downloadable!] (restricted)
  2. Stanton, Kenneth R., 2002. "Trends in relationship lending and factors affecting relationship lending efficiency," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 127-152, January. [Downloadable!] (restricted)
  3. Chilingerian, Jon A., 1995. "Evaluating physician efficiency in hospitals: A multivariate analysis of best practices," European Journal of Operational Research, Elsevier, vol. 80(3), pages 548-574, February. [Downloadable!] (restricted)
  4. Juang, Muh-Guey & Anderson, Gary, 2004. "A Bayesian method on adaptive preventive maintenance problem," European Journal of Operational Research, Elsevier, vol. 155(2), pages 455-473, June. [Downloadable!] (restricted)
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