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Returns to Scale as an Established Scaling Indicator: Always a Good Advisor?

Author

Listed:
  • Dellnitz Andreas
  • Rödder Wilhelm

    (FernUniversität in Hagen, Universitätsstraße 41, 58097Hagen, Germany)

Abstract

In data envelopment analysis (DEA), returns to scale (RTS) are a widely accepted instrument for a company to reveal its activity scaling potentials. In the case of increasing returns to scale (IRS), a company learns that upsizing activities improves its productivity. For decreasing returns to scale (DRS), the instrument likewise should depict a downsizing force, again for improving productivity. Unfortunately, here the classical RTS concept shows misbehavior. Under certain circumstances, it is the wrong indicator for scaling activities and even hides respective productivity improvement potentials. In this paper, we study this phenomenon, using the DEA concept, and illustrate it via little numerical examples and a real-world application consisting of 37 Brazilian banks.

Suggested Citation

  • Dellnitz Andreas & Rödder Wilhelm, 2021. "Returns to Scale as an Established Scaling Indicator: Always a Good Advisor?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 241(2), pages 173-186, April.
    • Handle: RePEc:jns:jbstat:v:241:y:2021:i:2:p:173-186:n:6
    DOI: 10.1515/jbnst-2019-0058
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