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Value Efficiency Analysis for Incorporating Preference Information in Data Envelopment Analysis

  • M. Halme
  • T. Joro
  • P. Korhonen
  • S. Salo
  • J. Wallenius

We develop a procedure and the requisite theory for incorporating preference information in a novel way in the efficiency analysis of Decision Making Units. The efficiency of Decision Making Units is defined in the spirit of Data Envelopment Analysis (DEA), complemented with Decision Maker's preference information concerning the desirable structure of inputs and outputs. Our procedure begins by aiding the Decision Maker in searching for the most preferred combination of inputs and outputs of Decision Making Units (for short, Most Preferred Solution) which are efficient in DEA. Then, assuming that the Decision Maker's Most Preferred Solution maximizes his/her underlying (unknown) value function at the moment when the search is terminated, we approximate the indifference contour of the value function at this point with its possible tangent hyperplanes. Value Efficiency scores are then calculated for each Decision Making Unit comparing the inefficient units to units having the same value as the Most Preferred Solution. The resulting Value Efficiency scores are optimistic approximations of the true scores. The procedure and the resulting efficiency scores are immediately applicable to solving practical problems.

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Paper provided by International Institute for Applied Systems Analysis in its series Working Papers with number ir98054.

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Date of creation: Aug 1998
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Handle: RePEc:wop:iasawp:ir98054
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  1. Thanassoulis, E. & Dyson, R. G., 1992. "Estimating preferred target input-output levels using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 56(1), pages 80-97, January.
  2. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
  3. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
  4. Bell,David E. & Raiffa,Howard & Tversky,Amos (ed.), 1989. "Decision Making," Cambridge Books, Cambridge University Press, number 9780521368513.
  5. Charnes, A. & Cooper, W. W. & Golany, B. & Seiford, L. & Stutz, J., 1985. "Foundations of data envelopment analysis for Pareto-Koopmans efficient empirical production functions," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 91-107.
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