Incorporating the Operating Environment Into a Nonparametric Measure of Technical Efficiency
01 Nov 1999-Journal of Productivity Analysis (Kluwer Academic Publishers)-Vol. 12, Iss: 3, pp 249-267
TL;DR: A nonparametric, linear programming, frontier procedure for obtaining a measure of managerial efficiency that controls for exogenous features of the operating environment is introduced.
Abstract: The ability of a production unit to transform inputs into outputs is influenced by its technical efficiency and external operating environment. This paper introduces a nonparametric, linear programming, frontier procedure for obtaining a measure of managerial efficiency that controls for exogenous features of the operating environment. The approach also provides statistical tests of the effects of external conditions on the efficient use of each individual input (for an input oriented model) or for each individual output (for an output oriented model). The procedure is illustrated for a sample of nursing homes.
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TL;DR: In this paper, a coherent data-generating process (DGP) is described for nonparametric estimates of productive efficiency on environmental variables in two-stage procedures to account for exogenous factors that might affect firms’ performance.
2,915 citations
Cites background or methods from "Incorporating the Operating Environ..."
...In a slight variation on this approach, Fried et al. (1993, 1999b, 2002) regressed radial and non-radial slacks on environmental variables....
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...…and Lall (1997), Burgess and Wilson (1998), Kirjavainen and Loikkanen (1998), McMillan and Datta (1998), Puig-Junoy (1998), Dietsch and Weill (1999), Fried et al. (1999a), Garden and Ralston (1999),Cheng et al. (2000), Resende (2000), Worthington and Dollery (2000), Chakraborty et al. (2001),…...
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TL;DR: Examination of second stage DEA efficiency analyses, within the context of a censoring data generating process (DGP) and a fractional data DGP, when efficiency scores are treated as descriptive measures of the relative performance of units in the sample suggests Tobit estimation in this situation is inappropriate.
705 citations
Cites methods from "Incorporating the Operating Environ..."
...In an interesting paper, Hoff (2007) advocates using tobit and ordinary least squares (OLS) in second stage data envelopment analysis (DEA) efficiency analyses stating “It is firstly concluded that the tobit approach will in most cases be sufficient in representing second stage DEA models....
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...…have been developed that incorporate the influence of efficiency factors in the DEA analysis (see Cooper et al., 2000; Coelli et al., 1999; Fried et al., 1999; Grosskopf, 1996), but the two-stage procedure is very appealing both in terms of its simplicity and the way efficiency is…...
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TL;DR: In this article, the authors proposed a new technique for incorporating environmental effects and statistical noise into a producer performance evaluation based on data envelopment analysis (DEA). The technique involves a three-stage analysis, in which DEA is applied to outputs and inputs only, to obtain initial measures of producer performance.
Abstract: In this paper we propose a new technique for incorporating environmental effects and statistical noise into a producer performance evaluation based on data envelopment analysis (DEA). The technique involves a three-stage analysis. In the first stage, DEA is applied to outputs and inputs only, to obtain initial measures of producer performance. In the second stage, stochastic frontier analysis (SFA) is used to regress first stage performance measures against a set of environmental variables. This provides, for each input or output (depending on the orientation of the first stage DEA model), a three-way decomposition of the variation in performance into a part attributable to environmental effects, a part attributable to managerial inefficiency, and a part attributable to statistical noise. In the third stage, either inputs or outputs (again depending on the orientation of the first stage DEA model) are adjusted to account for the impact of the environmental effects and the statistical noise uncovered in the second stage, and DEA is used to re-evaluate producer performance. Throughout the analysis emphasis is placed on slacks, rather than on radial efficiency scores, as appropriate measures of producer performance. An application to nursing homes is provided to illustrate the power of the three-stage methodology.
693 citations
Cites background or methods from "Incorporating the Operating Environ..."
...The data are described in detail by Fried et al. (1999) , and summary statistics are presented in Table 1. Two outputs are specified: inpatient days of skilled care (SKD), and inpatient days of intermediate care (ICD)....
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...The data are described in detail in Fried et al. (1999), and summary statistics are presented in Table 1....
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...It is also possible to extend the basic two-stage approach, as Fried et al. (1999) have done....
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...It is also possible to extend the basic two-stage approach, as Fried et al. (1999) have done....
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...The example concerns the operations of a sample of 990 US hospital-affiliated nursing homes previously analyzed by Fried et al. (1999)....
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TL;DR: In this paper, a general formulation of a nonparametric frontier model introducing external environmental factors that might influence the production process but are neither inputs nor outputs under the control of the producer is proposed.
Abstract: This paper proposes a general formulation of a nonparametric frontier model introducing external environmental factors that might influence the production process but are neither inputs nor outputs under the control of the producer. A representation is proposed in terms of a probabilistic model which defines the data generating process. Our approach extends the basic ideas from Cazals et al. (2002) to the full multivariate case. We introduce the concepts of conditional efficiency measure and of conditional efficiency measure of order-m. Afterwards we suggest a practical way for computing the nonparametric estimators. Finally, a simple methodology to investigate the influence of these external factors on the production process is proposed. Numerical illustrations through some simulated examples and through a real data set on Mutual Funds show the usefulness of the approach.
639 citations
TL;DR: In this article, the Tobit regression model was used to evaluate the determinants of bank efficiency in the European banking market, and it was shown that since the EU's Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence that these have converged.
Abstract: This paper investigates whether there has been an improvement in and convergence of productive efficiency across European banking markets since the creation of the Single Internal Market. Using efficiency measures derived from DEA estimation, the determinants of European bank efficiency are evaluated using the Tobit regression model approach. The established literature on modelling the determinants of bank efficiency is then extended by recognizing the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem, a bootstrapping technique is applied. Overall, the results suggest that since the EU's Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. The results also suggest that inference on the determinants of bank efficiency drawn from non-bootstrapped regression analysis may be biased and misleading.
628 citations
Cites methods from "Incorporating the Operating Environ..."
...A possible solution to this has been proposed by Fried et al. (1999) and involves estimating a SUR (Seemingly Unrelated Regression) system of equations for the slacks....
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...In this context, the term environment is used to describe factors that could influence the efficiency of a firm, where such factors are not traditional inputs and are not under the control of management (Fried et al., 1999)....
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...In this context, the term environment is used to describe factors that could influence the efficiency of a firm, where such factors are not traditional inputs and are not under the control of management (Fried et al., 1999)....
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References
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TL;DR: A nonlinear (nonconvex) programming model provides a new definition of efficiency for use in evaluating activities of not-for-profit entities participating in public programs and methods for objectively determining weights by reference to the observational data for the multiple outputs and multiple inputs that characterize such programs.
25,433 citations
Book•
01 Jan 1985
TL;DR: The Structure of Production Technology as discussed by the authors, Radial Input Efficiency Measures, Hyperbolic Graph Efficiency Measures and Non-radial Efficiency Measures for Scale Efficiency and Toward Empirical Implementation.
Abstract: The Structure of Production Technology.- Radial Input Efficiency Measures.- Radial Output Efficiency Measures.- Hyperbolic Graph Efficiency Measures.- A Comparison of Input, Output, and Graph Efficiency Measures.- Nonradial Efficiency Measures.- Measures of Scale Efficiency.- Toward Empirical Implementation.
1,933 citations
TL;DR: A model for measuring the efficiency of Decision Making Units =DMU's is presented, along with related methods of implementation and interpretation, and suggests the additional possibility of new approaches obtained from PFT-NFT combinations which may be superior to either of them alone.
Abstract: A model for measuring the efficiency of Decision Making Units =DMU's is presented, along with related methods of implementation and interpretation. The term DMU is intended to emphasize an orientation toward managed entities in the public and/or not-for-profit sectors. The proposed approach is applicable to the multiple outputs and designated inputs which are common for such DMU's. A priori weights, or imputations of a market-price-value character are not required.
A mathematical programming model applied to observational data provides a new way of obtaining empirical estimates of extrernal relations-such as the production functions and/or efficient production possibility surfaces that are a cornerstone of modern economics. The resulting extremal relations are used to envelop the observations in order to obtain the efficiency measures that form a focus of the present paper.
An illustrative application utilizes data from Program Follow Through =PFT. A large scale social experiment in public school education, it was designed to test the advantages of PFT relative to designated NFT =Non-Follow Through counterparts in various parts of the U.S. It is possible that the resulting observations are contaminated with inefficiencies due to the way DMU's were managed en route to assessing whether PFT as a program is superior to its NFT alternative. A further mathematical programming development is therefore undertaken to distinguish between "management efficiency" and "program efficiency." This is done via procedures referred to as Data Envelopment Analysis =DEA in which one first obtains boundaries or envelopes from the data for PFT and NFT, respectively. These boundaries provide a basis for estimating the relative efficiency of the DMU's operating under these programs. These DMU's are then adjusted up to their program boundaries, after which a new inter-program envelope is obtained for evaluating the PFT and NFT programs with the estimated managerial inefficiencies eliminated.
The claimed superiority of PFT fails to be validated in this illustrative application. Our DEA approach, however, suggests the additional possibility of new approaches obtained from PFT-NFT combinations which may be superior to either of them alone. Validating such possibilities cannot be done only by statistical or other modelings. It requires recourse to field studies, including audits e.g., of a U.S. General Accounting Office variety and therefore ways in which the results of a DEA approach may be used to guide such further studies or audits are also indicated.
1,544 citations
"Incorporating the Operating Environ..." refers background in this paper
...8. See Banker, Kaufman and Morey (1990), Byrnes (1985), Charnes, Cooper and Rhodes (1981) , Grosskopf and...
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TL;DR: This work evaluates the relative technical and scale efficiencies of decision making units DMUs when some of the inputs or outputs are exogenously fixed and beyond the discretionary control of DMU managers through mathematical programming formulations.
Abstract: We evaluate, by means of mathematical programming formulations, the relative technical and scale efficiencies of decision making units DMUs when some of the inputs or outputs are exogenously fixed and beyond the discretionary control of DMU managers. This approach further develops the work on efficiency evaluation and on estimation of efficient production frontiers known as data envelopment analysis DEA. We also employ the model to provide efficient input and output targets for DMU managers in a way that specifically accounts for the fixed nature of some of the inputs or outputs. We illustrate the approach, using real data, for a network of fast food restaurants.
1,220 citations
1,187 citations