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Individual Efficient Frontiers in Performance Analysis

In: Advances in Efficiency and Productivity Analysis

Author

Listed:
  • Markku Kallio

    (Aalto University School of Business)

  • Merja Halme

    (Aalto University School of Business)

Abstract

We propose a new approach for performance comparisons with a goal similar to the DEA or efficiency analysis based on stochastic frontiers. Our approach accounts for varying environmental factors and human resources among the units under consideration by assuming individual production possibility sets (PPS). In a partial equilibrium framework we assume that the observed netputs represent an equilibrium. Thus, each DMU is efficient with respect to its individual PPS. The netputs and estimated prices common for all units reveal characteristics of the individual PPSs and assess the units’ relative performance. To obtain such prices from scarce data we assume that the observed netput vectors represent a random sample of netput vectors. We use prices which render the realizations of individual profits or returns of the DMUs most likely. We compare the DEA based efficiency rankings with our performance rankings. Strong rank correlation is observed between the two. The discriminatory power of our ranking is superior to conventional DEA methods.

Suggested Citation

  • Markku Kallio & Merja Halme, 2021. "Individual Efficient Frontiers in Performance Analysis," Springer Proceedings in Business and Economics, in: Christopher F. Parmeter & Robin C. Sickles (ed.), Advances in Efficiency and Productivity Analysis, pages 195-209, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-47106-4_9
    DOI: 10.1007/978-3-030-47106-4_9
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