Cost, Revenue and Profit Efficiency Measurement in DEA: A Directional Distance Function Approach

Sahoo, B. K., Mehdiloozad, M. and Tone, K. (2014) Cost, Revenue and Profit Efficiency Measurement in DEA: A Directional Distance Function Approach, European Journal of Operational Research, Vol. 233, No. 3, Pages: 921-931.

Posted: 14 Feb 2014 Last revised: 10 May 2014

See all articles by Biresh Sahoo

Biresh Sahoo

Xavier Institute of Management

Mahmood Mehdiloozad

Department of Mathematics, College of Science, Shiraz University

Kaoru Tone

National Graduate Institute for Policy Studies (GRIPS)

Date Written: February 13, 2014

Abstract

Estimation of efficiency of firms in a non-competitive market characterized by heterogeneous inputs and outputs along with their varying prices is questionable when factor-based technology sets are used in data envelopment analysis (DEA). In this scenario, a value-based technology becomes an appropriate reference technology against which efficiency can be assessed. In this contribution, the value-based models of Tone (2002) are extended in a directional DEA set up to develop new directional cost- and revenue-based measures of efficiency, which are then decomposed into their respective directional value-based technical and allocative efficiencies. These new directional value-based measures are more general, and include the existing value-based measures as special cases. These measures satisfy several desirable properties of an ideal efficiency measure. These new measures are advantageous over the existing ones in terms of 1) their ability to satisfy the most important property of translation invariance; 2) choices over the use of suitable direction vectors in handling negative data; and 3) flexibility in providing the decision makers with the option of specifying preferable direction vectors to incorporate their preferences. Finally, under the condition of no prior unit price information, a directional value-based measure of profit inefficiency is developed for firms whose underlying objectives are profit maximization. For an illustrative empirical application, our new measures are applied to a real-life data set of 50 US banks to draw inferences about the production correspondence of banking industry.

Keywords: Data envelopment analysis; Cost efficiency; Revenue efficiency; Profit efficiency; Translation invariance; Directional distance function

JEL Classification: D24

Suggested Citation

Sahoo, Biresh K. and Mehdiloozad, Mahmood and Tone, Kaoru, Cost, Revenue and Profit Efficiency Measurement in DEA: A Directional Distance Function Approach (February 13, 2014). Sahoo, B. K., Mehdiloozad, M. and Tone, K. (2014) Cost, Revenue and Profit Efficiency Measurement in DEA: A Directional Distance Function Approach, European Journal of Operational Research, Vol. 233, No. 3, Pages: 921-931., Available at SSRN: https://ssrn.com/abstract=2395242

Biresh K. Sahoo (Contact Author)

Xavier Institute of Management ( email )

Xavier Square
Bhubaneswar, 751 013
India
+91 674 6647 735 (Phone)

HOME PAGE: http://hib.xub.edu.in/Hibiscus/Pub/faccvDet.php?client=xu&facid=XF325

Mahmood Mehdiloozad

Department of Mathematics, College of Science, Shiraz University ( email )

Shiraz
Iran
+98 9127431689 (Phone)

Kaoru Tone

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan

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