A reasonable benchmarking frontier using DEA : an incentive scheme to improve efficiency in public hospitals

There exists research relating management concepts with productivity measurement methods that offers useful solutions for improving management control in the public sector. Within this sphere, we connect agency theory with efficiency analysis and describe how to define an incentives scheme that can be applied in the public sector to monitor the efficiency and productivity of managers. To fulfill the main objective of this research, we propose an iterative process for determining what we define as a ‘reasonable frontier’, a concept that provides the foundation required to establish the incentive scheme for the managers. Our ‘reasonable frontier’ has the following properties: i) it detects the presence of outliers, ii) it proposes a procedure to establish the influence introduced by extreme observations, and iii) it sorts out the problem of data masking. The proposed method is applied to a sample of hospitals taken from the public network of the Spanish health service. The results obtained confirm the applicability of the proposal made. Summing up, we define and apply a useful method, combining aspects of agency theory and efficiency analysis, which is of interest to those public authorities trying to design effective incentive schemes which influence the decision making of the public managers.