A Monte Carlo simulation comparing DEA, SFA and two simple approaches to combine efficiency estimates
AbstractIn certain circumstances, both researchers and policy makers are faced with the challenge of determining individual efficiency scores for each decision making unit (DMU) under consideration. In this study, we use a Monte Carlo experimentation to analyze the optimal approach to determining individual efficiency scores. Our first research objective is a systematic comparison of the two most popular estimation methods, data envelopment (DEA) and stochastic frontier analysis (SFA). Accordingly we extend the existing comparisons in several ways. We are thus able to identify the factors which influence the performance of the methods and give additional information about the reasons for performance variation. Furthermore, we indicate specific situations in which an estimation technique proves superior. As none of the methods is in all respects superior, in real word applications, such as energy incentive regulation systems, it is regarded as best-practice to combine the estimates obtained from DEA and SFA. Hence in a second step, we compare the approaches to transforming the estimates into efficiency scores, with the elementary estimates of the two methods. Our results demonstrate that combination approaches can actually constitute best-practice for estimating precise efficiency scores. --
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Bibliographic InfoPaper provided by Center of Applied Economic Research Münster (CAWM), University of Münster in its series CAWM Discussion Papers with number 51.
Date of creation: 2011
Date of revision:
efficiency; data envelopment analysis; stochastic frontier analysis; simulation; regulation;
Find related papers by JEL classification:
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- D2 - Microeconomics - - Production and Organizations
- L5 - Industrial Organization - - Regulation and Industrial Policy
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-28 (All new papers)
- NEP-CSE-2011-11-28 (Economics of Strategic Management)
- NEP-ECM-2011-11-28 (Econometrics)
- NEP-EFF-2011-11-28 (Efficiency & Productivity)
- NEP-ORE-2011-11-28 (Operations Research)
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