Robustness of Farrell cost efficiency measurement under data perturbations: Evidence from a US manufacturing application

Date

2021-03-18

Advisors

Journal Title

Journal ISSN

ISSN

0377-2217

Volume Title

Publisher

Elsevier

Type

Article

Peer reviewed

Yes

Abstract

Measuring economic and cost efficiency receives ever-increasing attention of the executives and managers of small-and medium-sized enterprises (SMEs) to minimise the total production costs. The conventional Farrell cost efficiency (CE) as a key determinant requires the precise information on inputs, outputs and input prices, while in praxis uncertainty is inherent and inevitable in data and its negligence conceivably results in a dire approximation for CE measures. This paper is concerned with Farrell CE in situations of both endogenous and exogenous uncertainty. The source of uncertainty allows us to define two different scenarios; (i) in situations of endogenous uncertainty in input and output data where the uncertainty is affected by the decision maker, and (ii) in situations of uncertain prices for inputs where the uncertainty is exogenously given. In the first scenario, the theory of robust optimisation is adopted to develop the robust data envelopment analysis (DEA) models with the aim of grappling uncertainties in input and output data when measuring technical and cost efficiencies. The second scenario aims to accommodate uncertainties on price information by developing a pair of robust DEA models based upon robust optimisation estimating the upper and lower bounds for CE measures. This unprecedented study helps us to provide a generalised framework for economic efficiency with uncertainties in which conventional properties of Farrell measures are fulfilled. In addition to comparing the developed approach in this paper with other existing approaches through a simple numerical example, the usefulness and applicability of the suggested framework are minutely studied in an empirical application in the context of allocation problems.

Description

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.

Keywords

Data envelopment analysis, Cost efficiency, Uncertainty, Robust optimisation

Citation

Hatami-Marbini, A., Arabmaldar, A. (2021) Robustness of Farrell cost efficiency measurement under data perturbations: Evidence from a US manufacturing application. European Journal of Operational Research.

Rights

Research Institute

Centre for Enterprise and Innovation (CEI)