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DATA ENVELOPMENT ANALYSIS:

THEORY AND APPLICATIONS


Proceedings of the 10
th
International Conference on DEA


EDITED BY:
Rajiv Banker,
Ali Emrouznejad
Ana Lcia Miranda Lopes
Mariana Rodrigues de Almeida


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Title: Data Envelopment Analysis: Theory and Applications
Subtitle (series): Proceedings of the 10
th
International Conference on DEA
Venue: DEA2012, August 2012, Natal, Brazil
Edited by: Rajiv Banker, Ali Emrouznejad, Ana Lcia Miranda Lopes, Mariana
Rodrigues de Almeida
Date: December 2012
Number of Page: 305pp
ISBN: 978 185449 437 5
Citation:, Banker R., A. Emrouznejad, A. L. M. Lopes, M. R. de Almeida
(2012), Data Envelopment Analysis: theory and Applications:
Proceedings of the 10
th
International Conference on DEA, August 2012,
Natal, Brazil, 340pp, ISBN: 978 185449 437 5.

Data Envelopment Analysis:
Theory and Applications
Proceedings of the 10
th
International Conference on DEA, August 2012, Natal, Brazil


EDITED BY:
Rajiv Banker
Fox School of Business and Management
Temple University
Philadelphia, PA 19121
USA

Ali Emrouznejad
Aston Business School
Aston University
Birmingham B4 7ET
UK


Ana Lcia Miranda Lopes
Federal University of Minas Gerais - UFMG
School of Economics - FACE
Management Department
Belo Horizonte, 31270-901
Brazil

Mariana Rodrigues de Almeida
Department of Engineering and Production
University Federal do Rio Grande do Norte - UFRN
Natal, 59078-970
Brazil

December 2012
ISBN: 978 185449 437 5
PREFACE: A MESSAGE FROM THE LOCAL ORGANIZERS
Dear conference participants,
It is a great honor and pleasure to us from UFMG and UFRN welcome you to the 10
th

International Conference on Data Envelopment Analysis - DEA2012 in Natal, Brazil.
The main themes of the DEA2012 conference are Energy and Regulation and Health
Performance Management. In total, one workshop on Energy and Regulation of Energy
Companies, five panels, 28 sessions for paper presentations and and two poster sessions will
be available for the participants. You will find papers about applications in agriculture,
banking, logistics, education, energy regulation, health, information technology, supply chain
management, transportation, tourism and sports. Sessions about economic issues in modeling,
algorithms, price and allocative efficiency and sustainability are also presented. A hundred
seventy (170) people from 25 different countries have registered to this Conference. The
participation of Brazilian academics is substantial (54,6%). We indeed have the pleasure to
receive people from distribution and transmission energy companies that are interested in
discussing the use of the DEA methodology to the Brazilian energy regulation model.
Foreigner and Brazilian consulting companies are also registered.
We would like to take this opportunity to express our sincere thanks to the board of iDEAs
that have accepted our proposal in Thessaloniki, Greece on august 2011, granting Brazil the
opportunity of bringing this prestigious Conference for the first time to the South America. We
are grateful to the stream organizers and members of the DEA in practice and scientific
conference committee. We warmly thank to Professor Rajiv Banker and Professor Ali
Emrouznejad for their priceless dedication and hard work in setting up this Conference.
We wish you all an interesting and enjoyable time in Natal, Brazil.


Ana Lucia Miranda Lopes
Universidade Federal de Minas Gerais,
UFMG











Mariana Almeida
Universidade Federal do Rio Grande do Norte, UFRN




Proceedings of the 10
th
International Conference on DEA Brazil2012 5
TABLE OF CONTENTS
1. A genetic algorithm approach to efficiency assessments with common weights ...... 9
Valiakos Athanasios
2. A new approach to assess performance of the Brazilian national immunization
program (NIP) ................................................................................................................ 16
Castro Lobo MS
Menegolla IA
Estellita Lins MP
3. A new approach to cross efficiency evaluation based on MILP model and
measurement of energy efficiency ............................................................................... 22
Mehmet Guray UNSAL
Hasan BAL
H. Hasan ORKCU
4. An effectiveness analysis of different techniques for development of IT software
projects .......................................................................................................................... 30
Marco Mendes
Ana Lcia Miranda Lopes
Rajiv Banker
5. An IDEA model to evaluate the overall performance of Buyer-Supplier .................. 37
Zahra Yousefi
Mohsen Rostamy-Malkhalifeh
Somayeh Mamizadeh
6. Assessing Performance of Organized Pharmacy Retail Stores using Data
Envelopment Anal ysis .................................................................................................. 41
G N Patel
Smiti Pande
7. Behavioral effects of DEA on performance assessment ............................................ 48
Heinz Ahn
Nadia Vazquez Novoa
8. Data Envelopment Analysis of the effieincy frontier for the results achived by
Formula 1 drivers and teams ........................................................................................ 55
Prof. Dr. Aparecido Jorge Jubran
Profa. Msc. Laura Martinson Provasi Jubran
Jos Rubens Moura Martins
Jane Leite Silva
9. Data Envelopment Analysis Type Linear and Goal Programming Models For
Measuring Energy Efficiency Performance of OECD Countries ................................ 60
Hasan BAL
Mehmet Guray UNSAL
10. Decentralization and productivity of the public health service in Brazil ................... 68
Alssio Tony Cavalcanti de Almeida
Carlos Eduardo Gasparini


Proceedings of the 10
th
International Conference on DEA Brazil2012 6
11. Deregulation and Performance of Mexican Banking ............................................... 75
Francisco Vargas Serrano
Arnulfo Castellanos Moreno
Gang Cheng
Panagiotis Pzervopoulos
Luis Rentera Guerrero
12. Economies of scale and scope in mental health care................................................. 82
J.A. Wilschut
B.L. van Hulst
J.L.T Blank
13. Efficiency anal ysis and long run performance: a sequential model for
organizational assessment ........................................................................................... 92
Frederico A. de Carvalho
Marcelino Jos Jorge
Marina Filgueiras Jorge
14. Efficiency in the industrial sectors of Brazil in terms of contributing to sustainable
development .................................................................................................................. 99
Flvia de Castro Camioto
Enzo Barberio Mariano
Daisy Aparecida do Nascimento Rebelatto
15. Efficiency in the management of sanitation and its impacts on health promotion: an
aplication of data envelopment analysis DEA ........................................................ 106
Karlos Eduardo Arcanjo da Cruz
Francisco de Sousa Ramos
16. Efficiency of Three Outliers Detection Tests on Non-Parametric Frontiers Methods ...
................................................................................................................................... 114
Victor Maia Senna Delgado
Igor Viveiros Melo Souza
17. Evaluation of the Benchmarking Model Proposed by the Brazilian Electricity
Regulator for Energy Distribution Companies: The Case of Tariff Revision.................
................................................................................................................................... 121
Giordano Bruno Braz de Pinho Matos
Marcelo Azevedo Costa
Ana Lcia Miranda Lopes
Roberta de Cssia Macedo
18. Integration of BSC, DEA and Game Theory in the performance of public health
service .......................................................................................................................... 137
Marco Aurlio Reis dos Santos
Fernando Augusto Silva Marins
Valerio A. P. Salomon
19. Iteratively Weighted Least Squares in Stochastic Frontier Estimation Applied to the
Dutch Hospital Industry .............................................................................................. 147
Jos L. T. Blank
Aljar J. Meesters


Proceedings of the 10
th
International Conference on DEA Brazil2012 7
20. Least distance efficiency measures satisfying strong monotonicity on the efficient
frontier .......................................................................................................................... 163
Hirofumi Fukuyama
Kazuyuki Sekitani
Jianming Shi
21. Maximal Allocated Benefit and Minimal Allocated Cost and its Application ........... 171
Mozhgan Mansouri Kaleibar
Sahand Daneshvar
22. Measurement of returns to scale using a non-radial DEA model............................. 184
Vladimir E. Krivonozhko
Finn R. Frsund
Andrey V. Lychev
23. Multimethodology applied to the assessment of municipalities health performance
in Brazil ........................................................................................................................ 193
Marcos Pereira Estellita Lins
Sergio Orlando Antoun Netto
24. On the Measurement of Social Efficiency in Microfinance Institutions ................... 201
Breno Sampaio
Lcio Silva
25. Performance Evaluation in Hospitals: a study on hospitals financed by the Brazilian
Unified Health System ................................................................................................. 209
Antnio Artur de Souza
Emerson Alves da Silva
Douglas Rafael Moreira
Alisson Maciel de Faria Marques
Ewerton Alex Avelar
Bernardo Franco Tormin
26. Performance Evaluation of expenditure in Primary Care: the Case of Brazil s
Southeastern cities. .................................................................................................... 216
Lucas Maia dos Santos
Mrcio Augusto Gonalves
Mrcia Mascarenhas Alemo
Marco Aurlio Marques Ferreira
Lucas Campos Vaz
Heloiza Azevedo Drummond
27. Reconceptualizing the DEA Bootstrap for improved estimations in the presence of
small samples .............................................................................................................. 226
Panagiotis D. Zervopoulos
Francisco Vargas
Gang Cheng
28. Relative balance as a complementary measure to relative efficiency ..................... 233
Heinz Ahn
Ludmila Neumann
Nadia Vazquez Novoa


Proceedings of the 10
th
International Conference on DEA Brazil2012 8
29. Statistical Inference and Efficient Portfolio Investment Performance ..................... 239
Shibo Liu
Tom Weyman-Jones
30. Study of technical efficiency in product development in steel company, with
application of Data Envelopment Anal ysis (DEA) ..................................................... 245
Regina Rocha de Morais Gonalves
Jos Edson Lara
Ana Lcia Miranda Lopes
Ronaldo Lamounier Locatelli
31. Technical eciency of Burkina Faso primary public health care centers ............... 252
Oumarou Hebie
Simon Tiendrebeogo
Sni Kouanda
Abdel Latef Anouze
32. The efficiency of Brazilian electricity distributors during 2004 2009. An
application using DEA corrected by envi ronmental and stochastic factors.
................................................................................................................................... 259
Fernando Damonte
Mariana De Santis
33. The production efficiency in sugarcane farms .......................................................... 268
Terezinha Bezerra Albino Oliveira
Antonio Cezar Bornia
Suely de Ftima Ramos Silveira
Mauro Wagner de Oliveira
Alexandre Matos Drumond
34. Theory of robust optimization in overall profit efficiency with data uncertainty .... 277
N. Aghayi
M.A. Raayatpanah
35. The efficiency in Tourism Investment capture in relation to Highways Investment in
Tourist Routes of Esprito Santo State, Brazil .......................................................... 285
Marta Monteiro da Costa Cruz
Josiane Baldo
36. The investment in ports enterprises in Espirito Santo, Brazil .................................. 291
Karen Vassoler Martins
Marta Monteiro da Costa Cruz
37. Benchmarking the Efficiency of Third Party Logistics in Brazil Using Data
Envelopment Anal ysis ................................................................................................ 297
Lus Filipe Azevedo de Oliveira
Mariana Rodrigues de Almeida

Proceedings of the 10
th
International Conference on DEA Brazil2012 9
1. A genetic algorithm approach
to efficiency assessments with
common weights
Valiakos Athanasios
Department of Informatics, University of Piraeus, 80 Karaoli & Dimitriou Str., 18534 Piraeus,
Greece, avaliakos@unipi.gr
Abstract
The common weights approach is one of the most prominent methods to further
prioritize the subset of DEA efficient units. This approach can be modeled as a multi-
objective problem, where one seeks for a common set of weights that locates the
efficiency ratio of each unit as close as possible to the target score of 1. In such a
setting, different metrics can be applied to measure the distance of the efficiency ratios
from target, such as the L
1
, L
2
and L

. When L
1
and L
2
metrics are used the models
derived are non-linear. In case of the L

metric, the problem can be heuristically


solved by the bisection method and a series of linear programs. We investigate in this
paper the ability of genetic algorithms to solve the problem for estimating efficiency
scores, by using an evolutionary optimization method based on a variant of the Non-
dominated Sorted Genetic Algorithm.
Keywords: Data envelopment analysis, Common weights analysis (CWA), Genetic
algorithms, evolutionary optimization
Introduction
In DEA efficiency assessments, the weights for inputs and outputs are estimated to the
best advantage for each unit, so as to maximize its relative efficiency. Basically, DEA
provides a categorical classification of the units into efficient and inefficient ones.
However, although DEA is strong in identifying the inefficient units it is weak in
discriminating among the efficient units. The basic DEA model often rates too many
units as efficient. This is a commonly recognized problem of DEA, which becomes
more intense when the number of units is relatively small with respect to the total
number of inputs and outputs. Further discrimination among the efficient units is an
issue that has attracted considerable attention in the DEA literature (Angulo-Meza et al.
2002 [0]. The common weights approach is one of the most prominent methods to
further prioritize the subset of DEA efficient units. This approach can be modeled as a
multi-objective problem, where one seeks for a common set of weights that locates
the efficiency ratio of each unit as close as possible to the target score of 1. In such a
setting, different metrics can be applied to measure the distance of the efficiency ratios
from target, such as the L
1
, L
2
and L

. When L
1
and L
2
metrics are used the models
derived are non-linear. In case of the L

metric, the problem can be heuristically


solved by the bisection method and a series of linear programs. We investigate in this

Proceedings of the 10
th
International Conference on DEA Brazil2012 10
paper the ability of genetic algorithms to solve the problem for estimating efficiency
scores, by using an evolutionary optimization method based on a variant of the Non-
dominated Sorted Genetic Algorithm, Deb et al. (2002) [0].
In this paper we introduce the Evolutionary Genetic Algorithms towards the multi-
criteria approach using common set of weights. The rest of the paper is organized as
follows. The next section describes the global efficiency approach and a bisection
method to solve it linearly. The evolutionary algorithm is introduced in the third
section. The forth section presents and discusses the results obtained by applying
these methods under the Chebyshev metric. Conclusions finalize this research.
Efficiency assessments with common weights
Efficiency assessment with common weights is used in many publications such as Deb
et al. (2002) [0] Kao et al. (2005) [0] Liu et al. (2008) [0] Wang et al. (2010) [0] and Kao
et al. (2010) [0]. Common weights approach in DEA forms a multi-objective
mathematical program. With conventional DEA each DMU maximizes its ratio of
weight to the other values. From a general perspective these common inputs and
common outputs must have also common weights to objectively measure the
efficiency. The relative efficiencies of conventional DEA
1...n
h are here converted into
calculating the ideal points optimizing each and every objective function following the
multi-objective linear model:
1
1 1
1( , ) ( , )
1
1 1
max{ ,..., }
s s
r r r rn
r r
u v n u v m m
i i i in
i i
u y u y
h h
v x v x
= =
= =
= =


(1)
s.t.
1 1
0, j=1,...,n
s m
r rj i ij
r i
u y v x
= =



, ,
r r
u v r i

Within the family of LP metrics, L
1
and L

metrics are of particular interest in the field


of Multi-Objective Linear Programming. This is because they are the only LP metrics
that result in linear scalar problems, when minimizing a distance of the frontier to a
reference point. Therefore, let d be the minimum distance which optimizes all
efficiency scores for each DMU. Since h
k
is the ideal point of DMU
k
, the distance from
ideal score 1 is minimized with different metrics.
The metrics
Within the family of LP metrics, L
1
and L

metrics are of particular interest in the field


of Multi-Objective Linear Programming. This is because they are the only LP metrics
that result in linear scalar problems, when minimizing a distance of the frontier to a
reference point. The L

metric can be calculated from the following equation,




Proceedings of the 10
th
International Conference on DEA Brazil2012 11
|| || : minmax{1 }, 1,...
k
k
d h k n

= = (2)

The Chebychev norm is a distance function where the absolute value of the largest
coordinates difference between two points absolutely dominates. The L
1
metric can
be calculated by the following equation,

1
1
|| ||: min (1 )
n
k
k
d h
=
=

(3)

The Manhattan norm hat represents the shortest distance in unit steps along
each axis between two points. The case of L
2
is calculated from,

2
2
1
|| || : min (1 )
n
k
k
d h
=
=

(4)

The Euclidean norm between two points is the length of the straight line between the
two points and it is by far the most commonly used norm.
Therefore, if this metric is used in Global DEA, only the largest factors difference is
taken into account (thus leading to the most balanced solution between achievements
of different factors).
For the case of L

, the above model Eq. (1) although not linear it can be handled
through bisection search - Despotis (2002) [0] using the following equivalent form,

|| || min d z

= (5)
s.t.
1 1
0, 1,...,
s m
r rj i ij
r i
u y v x j n
= =
=


1
1
1 ( ) 0, 1,...,
s
r rj
r
m
i ij
i
u y
z j n
v x
=
=
+ =


, ,
r i
u v r i
0 z

For the case of L1, the model becomes

1
1
|| || min , j=1,...,n
s
j
r
d d
=
=

(6)

Proceedings of the 10
th
International Conference on DEA Brazil2012 12
s.t.
1
1
1, j=1,...,n
s
r rj
r
j m
i ij
i
u y
d
v x
=
=
+ =


, ,
r r
u v r i
0, j=1,...,n
j
d

and for L2,

2
2
1
|| || min , j=1,...,n
s
j
r
d d
=
=

(7)
s.t.
1
1
1, j=1,...,n
s
r rj
r
j m
i ij
i
u y
d
v x
=
=
+ =


, ,
r r
u v r i
0, j=1,...,n
j
d
The above two models are non-linear.
GA DEA
Since Eq. (1) is not linear, it can be approached with Genetic Algorithms. Multi-
objective Evolutionary Algorithms (EAs) are GAs customized to solve multi-objective
problems by using specialized fitness functions. EAs, such as Non-dominated Sorted
Genetic Algorithm NSGA-II can be modified to find a set of multiple non-dominated
solutions in a single run.
Multiobjective Evolutionary Algorithms (EAs) are GAs customized to solve multi-
objective problems by using specialized fitness functions. In order to achieve
evolutionary multi-objective optimization, three different aspects must be considered:
Fitness Assignment, Diversity Mechanism and Elitism. Fitness Assignment is actually
the fitness function chosen. Diversity Mechanism is the way next population is
generated. Elitism is whether the best dominating solutions found so far survive to the
next generation. Therefore a controlled genetic algorithm, which is a variant of Non-
dominated Sorted Genetic Algorithm (NSGA-II), is proposed in this research. For
fitness function Pareto Ranking approach is utilized. The population is ranked
according to a dominating rule. In order to maintain the Diversity, crowding distance
is employed, while Elitism exists partially. An elitist GA always favours individuals
with better fitness value (rank). A controlled elitist GA also favours individuals that
can help increase the diversity of the population even if they have a lower fitness

Proceedings of the 10
th
International Conference on DEA Brazil2012 13
value. It is important to maintain the diversity of population for convergence to an
optimal Pareto front. Diversity is maintained by controlling the elite members of the
population as the algorithm progresses.
The main advantage of evolutionary algorithms, when applied to solve multi-objective
optimization problems, is the fact that they typically optimize sets of solutions,
allowing computation of an approximation of the entire Pareto front in a single
algorithm run. The main disadvantage of evolutionary algorithms is the much lower
speed. Through multi-objective solution global weights are acquired, rendering some
DMUs on the Pareto front efficiency frontier. This is because a DMU is (Pareto)
efficient if there is no other DMU, or a non negative convex linear combination of m
inputs and s outputs of some DMUs, that improves one DMU score without worsening
at least one of the other DMU score for all objectives simultaneously. Finally in order
to choose the best solution we apply the LP metric. In order to select one from the
Pareto front Eq. (3~5) are used. Below are the parameters used to execute GA DEA.

Table 1. Parameters used in Genetic Algorithm setup
Population size 75
Maximum number of generations 150
Generation gap (GGAP) 0.9
Mutation rate 0.5 under mutationadaptfeasible
Pareto front 0.5
Crossover strategy Double point crossing
Stopping criteria Either the best solution does not improve
for 20 generations or the maximum
number of generations has been reached.

Genetic Algorithm approach examines each solution in a specific area. After that, a
pareto front is formed with the dominating solutions. The selection of the best
solution is a decision of the decision maker. Therefore, by applying the metrics, the
decision maker can select the best solution minimizing the distance from ideal value 1.
Results and discussions
To examine this approach a simulation was conducted. In each case, we initially
generate data from a data generation process and then conduct 200 trials. The number
of DMUs for experimental purposes was 20, a relatively small number.
The inputs and the outputs of each DMU were produced from a productive function
( ) x
. Let n be the number of DMUs and m the number of inputs and s the number of
outputs for each DMU. Supposing a Data Generation Process that generates the inputs
ij
x x = . Therefore in order to produce the outputs
ij
y y = , the following equation was
used,
( )
1
m
x i
i
y x e

=
= =

(8)

Proceedings of the 10
th
International Conference on DEA Brazil2012 14
where
i
is generated independently from independent uniform random distribution
on the interval [0.6, 0.8]. Variable e is a small error multiplied with the production
function to emulate the inefficient DMUs.
For the simulation, mean differences were calculated for each metric. Genetic
Algorithm approach is compared with bisection linear programming (bLP) algorithm
(Eq. 5) using L metric (Eq. 2). Similarly it was compared with nonlinear L1 (Eq. 6)
and nonlinear L2 (Eq. 7) using the L1 (Eq. 3), and L2 (Eq. 4) metrics respectively.
Taking different cases into account, combinations of 2-4 inputs and 2-4 outputs are
tested. In Table 2, the mean differences are displayed.

Table 2. Mean differences of minimum distances using L

, L
1
and L
2
metric
bLP
d
- GA
d
nonLP
d1
- GA
d1
nonLP
d2
- GA
d2

IxO Mean Range Mean Range Mean Range
2x2 0.0571 [0.0066 , 0.2176] 0.0496 [0.0259 , 0.2491] 0.0137 [0.0096 , 0.0338]
2x3 0.0556 [0.0096 , 0.3149] 0.0567 [0.0024 , 0.2226] 0.0272 [0.0018 , 0.0478]
2x4 0.0437 [0.0169 , 0.1275] 0.0190 [0.0031 , 0.1190] 0.0318 [0.0064 , 0.0732]
3x2 0.0478 [0.0034 , 0.2140] 0.0439 [0.0167 , 0.1331] 0.0314 [0.0018 , 0.1882]
3x3 0.0515 [0.0089 , 0.1705] 0.0110 [0.0064 , 0.1516] 0.0380 [0.0038 , 0.1622]
3x4 0.0522 [0.0140 , 0.2165] 0.0950 [0.0528 , 0.2076] 0.0430 [0.0294 , 0.1700]
4x2 0.0434 [0.0062 , 0.2104] 0.0110 [0.0064 , 0.2516] 0.0625 [0.0093 , 0.2538]
4x3 0.0447 [0.0085 , 0.1693] 0.0560 [0.0019 , 0.0772] 0.0427 [0.0252 , 0.2005]
4x4 0.0431 [0.0118 , 0.1775] 0.0496 [0.0222 , 0.0537] 0.0137 [0.0083 , 0.1862]

Table 2 shows that the mean values are close to zero. The minimum distances using
different metrics are obtain with a single run of the genetic algorithm. It is also
important to note that the range of the values is also significant low. A further
inspection shows that the overall efficiency scores from GA and bLP do not vary
much.
Conclusions
In this paper, a genetic algorithm is presented to estimate the efficiency scores with
common weights. No prior research is been made towards using genetic algorithms in
order to solve multi objective DEA. Different metrics are used as part of the algorithm
in order to minimize distance of all DMUs from efficient value 1. The general fitness
framework utilizes the NSGA-II approach taking into consideration the LP metric.
A simulation is conducted in order to review the capability of the algorithm. The
results indicated that the genetic algorithm is capable of minimizing the distance from
optimum value 1. In other words, through optimization of the genetic algorithm there
is a set of common weights that minimizes the total distance. In scenarios with various
number of inputs and outputs, the data has been analyzed and metrics are computed.
It is proved that using Genetic Algorithms is a viable solution to estimate efficiency
scores with common weights, and is in fact less complex than nonlinear equivalent. In
addition, the efficient units are slightly increased since the genetic algorithm uses
pareto front optimization.

Proceedings of the 10
th
International Conference on DEA Brazil2012 15
References
Dyson R.G., Thanassoulis E. (1988). Reducing weight flexibility in data envelopment
analysis, Journal f the Operational Research Society (39): 563576.
Angulo-Meza, L., Estellita Lins, M.P. Review of methods for increasing discrimination in
data envelopment analysis Annals of Operations Research 116(1-4): 225-242.
Deb K., Pratap A., Agarwal S., Meyarivan T. (2002). A fast and elitist multi-objective
genetic algorithm: NSGA-II. IEEE Transactions on Evolutionary Computation (6): 182
197.
Kao, C. , Hung, H.-T. (2005) Data envelopment analysis with common weights: The
compromise solution approach Journal of the Operational Research Society 56(10):
1196-1203.
Liu, F. - H. F. , Hsuan Peng, H. (2008) Ranking of units on the DEA frontier with
common weights Computers and Operations Research 35(5): 1624-1637.
Wang, Y. M. , Chin, K. S. (2010) A neutral DEA model for cross-efficiency evaluation
and its extension Expert Systems with Applications 37(5): 3666-3675.
Kao, C. (2010) Malmquist productivity index based on common-weights DEA: The
case of Taiwan forests after reorganization Omega 38(6): 484-491
Wu, J. , Liang, L. , Yang, F. (2009) Determination of the weights for the ultimate cross
efficiency using Shapley value in cooperative game Expert Systems with Applications
36(1): 872-876
Despotis D.K. (2002). Improving the Discriminating Power of DEA- Focus on Globally
Efficient Units. Journal of the Operational Research Society (53): 314-323.

Acknowledgements
This study is funded and supported by the Institute of National Funds of Greece, since
one of the authors is under financial scholarship.




Proceedings of the 10
th
International Conference on DEA Brazil2012 16
2. A new approach to assess
performance of the Brazilian
national immunization program
(NIP)
Castro Lobo MS
Federal University of Rio de Janeiro, University Hospital HUCFF/UFRJ, University City/Fundo
Island, SEAV 5 andar, sala 5 A 26, R. Professor Rodolfo Rocco, 255, 21941-913 Rio de Janeiro,
RJ, Brasil, ms.lobo@superig.com.br (corresponding author)
Menegolla IA
Pan-American Health Organization PAHO, Setor de Embaixadas Norte, Lote 19, CEP 70800-400
Federal District, Brazil Caixa Postal 08-729, 70312-970 Brasilia, DF, Brasil,
ivonemenegolla@yahoo.com.br
Estellita Lins MP
Alberto Luiz Coimbra Post-Graduation and Engineering Research Institute, Operational Research,
COPPE/UFRJ, Technology Center, Block F, Room 103, University City/ Fundo Island, Rio de
Janeiro, Brazil, estellita@pep.ufrj.br
Abstract
The study develops an alternative measure of efficiency to assess the Brazilian
National Immunization Program, using Data Envelopment Analysis (DEA), output
oriented, Variable Returns to Scale (VRS) model, in order to congregate differing
indicators in a unique index and to consider the differences among the federal units
when comparing the twenty six Brazilian states that have diverse socioeconomic and
urbanization scenarios. The NIP program can be considered highly efficient in Brazil.
The mean efficiency score for the 26 states was 93.7 % (5.4 % SD). 16 states were
considered efficient. To reach the frontier of best practices, each state and region
could have an individual goal for vaccine homogeneity. DEA technique evaluates
homogeneity indicators for various vaccines in the same model making it possible to
construct an efficiency index for the first year of life immunization cycle.
Keywords: Data Envelopment Analysis, Health Services Assessment, Public Health
Policy, National Program of Immunization
Introduction
Immunization is the process whereby a person is made immune or resistant to an
infectious disease, typically by the administration of a vaccine. Vaccines stimulate the
bodys own immune system to protect the person against subsequent infection or
disease. Immunization is n a proven tool for controlling and eliminating life-
threatening infectious diseases and is estimated to avert between 2 and 3 million
deaths each year. It is one of the most cost-effective health investments, with proven

Proceedings of the 10
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strategies that make it accessible to even the most hard-to-reach and vulnerable
populations.

The Brazilian National Immunization Program (NIP) as a health policy nowadays
practiced dates from 1973. The NIP is public, universal and managed by state or
provinces' health authorities. The major challenges for the program are logistics for a
country that have continental dimensions and the necessity of qualified human and
material resources to cope with that. NIP is organized by life cycles (children,
teenagers, adults and old people) and vaccines are applied as routine or by campaign
means. For children under one year-old, the vaccines are to prevent: severe
tuberculosis (BCG), poliomyelitis (polio), B hepatitis (HepB), diphteria, tetanus,
whooping cough and haemophilus influenzae B (tetravalent), rotaviruses,
pneumococcus, meningoencephalitis, and measles, mumps and rubeola (trivalent
MMR), yellow fever (in endemic States).
According to WHO, the vaccination programs efficiency is assessed by three main
indicators, which are used for each dose, and each kind of vaccine, giving ways to
long spreadsheets and datasets, turning the analysis sometimes exhaustive and difficult
to summarize. They are:
a) Coverage, a key measure of immunization systems performance, is calculated
by the actual number of applications divided by expected number of
applications, according to the demographic structure of the state. The index is
expected to be above 90%, ideally 100%;
b) Homogeneity, that is, the proportion of municipalities inside the state with
coverage above 95%. The importance of this indicator is based in its capacity
for herd immunity, which means that, even if you are not vaccinated, if you
live in a place where all around you are immune, you may be considered
protected as well;
c) Abandon Rate, that is, for vaccines that must be repeated, as tetravalent and
poliomyelitis, the difference between the number of applications for last and
the first given doses, divided by the number of first doses. These are proxies to
the fact that a person had access to all doses that guaranteed full protection.
The expected value should be below 5%.

As there is no sense in trading off the usual goals for coverage and abandon rate, this
paper intends to develop an alternative measure of efficiency to assess the Brazilian
Immunization Program in 2010, using Data Envelopment Analysis (DEA) in order to
congregate the differing homogeneity indicators as a unique index and to consider the
different resource facilities observed when comparing the twenty six Brazilian states
that together give this country a continental dimension, with diverse socioeconomic
and urbanization scenarios.



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Methods
Many performance and benchmark reviews approach the issue of health care
assessment from the efficiency perspective. Chillingerian and Sherman, Hollingsworth
and ONeill et al. health care efficiency studies collectively provided comprehensive
overview of the theme, pointing out the general advantages, concerns and limitations
of applying these methods in multi-product organizations, practices in public policies
or programs.
The most common used technique, Data Envelopment Analysis based on linear
programming, shows which health organizations are efficient, gives the magnitude of
inefficiency and indicates the means of improving efficiency by giving targets for each
of the inputs and/or outputs individually. Details of the technique are presented
elsewhere.
The DMUs, in our case are the Brazilian States, or the local units responsible for the
NIP organization and logistics. The ones over the frontier, therefore, efficient, have an
efficiency measure equals to 1.00 or 100%, while the DMUs located under the frontier
are inefficient (values between 0 and 1.00, or 100%). The production model used in
this work considers variable returns to scale (VRS) and is oriented to the increase of
outputs to the projection in the frontier (maximization). The VRS model allows an
inefficient unit to be compared only with others efficient units of similar size or
operate in similar scale and is the choice to cope with the diversity of the States' sizes
and social scenarios. The orientation choice (output) admits the maximum success of
the results (higher homogeneity), given a fixed amount of resources.
Considering the fact that the traditional indicators used to assess NIP are already
fractions, which could jeopardize the linear properties of the frontier, the authors ran
a model assuming only the absolute values that generated the homogeneity indicators.
The inputs were the number of births in 2009 and the number of municipalities of
each State; the outputs were the number of municipalities with coverage over 95% for
the studied vaccines: BCG, HepB (3rd dose), polio (3rd dose), tetravalent (3rd dose)
and MMR (first). In this way, the DEA score index would comprise homogeneity for
many vaccines in the same model. Once calculated the number of municipalities that
needed to reach 95% coverage, the projection was used as a numerator to reconstruct
the homogeneity index to be pursued as a new goal.
All demographic and vaccination data were provided by the Brazilian Ministry of
Health.
Results and Discussion:
As observed in Figure I, there are clearly two distinct subgroups of Brazilian Regions,
that congregate, at one side: Regions North and Northeast, less developed, with lower
mean Human Development Index - HDI (0.73) and higher proportions of rural and
disperse populations (mean 25%); at the other side: Regions South, Southeast and
Center-West, with higher mean HDI (0.82), less rural population (mean 13%), and
where the bigger cities are located (with higher populations, higher number of
newborns). In a clockwise overview of Figure I, the first subgroup goes from
Rondnia to Bahia and the second subgroup goes from Minas Gerais to Gois. So

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Paulo is an outlier as the State comprises almost 22% of all the Brazilian population.
This demographic and socioeconomic difference has a sanitary impact, with lower
values for the first subgroup, especially concerning the indicators for homogeneity as
the access to remote and disperse populations can only be guaranteed by mobile
teams.
Table I shows the DEA scores, the new goals established for each homogeneity output
after the model was ran, and the benchmarks for the inefficient States. The mean
efficiency score for the 26 states was 93.7% (5.4 % SD), the minimum score was 53.8%
(Rondnia).
Given the different proportions of rural populations, each state could have an
individual goal for homogeneity to each vaccine to catch the frontier. In North and
Northeast Regions, the mean BCG homogeneity should raise from 40.1 % to 50.9 %;
HepB homogeneity, from 52.7% to 62.4 %; polio homogeneity, from 56,7% to 65.4 %;
tetravalent homogeneity, from 56.1% to 65.3 %; MMR homogeneity, from 55.4% to 64.6
%. In South, Southeast and Center-West Regions, the mean BCG homogeneity should
raise from 60.4% to 63.0%; HepB homogeneity, from 66.4% to 69.2 %; polio
homogeneity, from 72.4% to 75.8 %; tetravalent homogeneity, from 72.1% to 75.9 %;
MMR homogeneity, from 64.6% to 66.8 %. These mobile goals give a more realistic
scenario, that is, the DEA model brings an evidence-based figure of what goal should
be made plausible and attainable to the health manager.
For each inefficient State, the benchmarks were defined based on the projection in the
frontier of best practices. Sixteen States were efficient (number of references in
parenthesis): Acre (0), Roraima (6), Par (0), Amap (0), Tocantins (4), Maranho (1),
Pernambuco (0), Sergipe (1), Minas Gerais (3), Esprito Santo (4), So Paulo (1),
Paran (2), Santa Catarina (3), Rio Grande do Sul (0), Mato Grosso do Sul (3), Gois
(5). As seen in administrative practice, the respective benchmarks should be explored
even beyond the studied variables - as examples to orientate changes for better
results.
In the benchmarking process, care must be taken when comparing States with
different demographic and socioeconomic structures as the inefficient units are
projected into different parts (facets) of the best practice frontier. The risk of ranking
efficiency scores and misinterpretation must be highlighted because, when you show
these results to a health care authority, this is the usual first observation of the
manager, which can damage the reliability and face validity of the method.
In summary, from the multi-input multi-output model perspective, the DEA score in
a unique index - presents a picture of homogeneity performance of each State that
congregates many vaccine schemes offered in the first year of life; in some way,
substituting lots of datasheets that can even bring contradictory results. Indicators for
vaccine coverage and abandon rate should maintain the goals preconized by the
World Health Organization (WHO). On the other hand, the concise DEA measure can
be scrutinized to offer much more information, as: a) the new goals for each indicator,
so that the DMU can project and reach the best practice frontier (an useful tool for
health manager); b) the reference groups according to the facet of the frontier were
the inefficient unit should be projected (the benchmarks are the vertices of theses

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facets); c) the weights given to each variable, so that the model tend to prioritize the
ones that behave in a more efficient way comparing to the other units.


Figure I: Comparing Brazilian States according to Demographic Characteristics

Table II DEA Model Results: Scores, Immunization Goals and Benchmarks for
the NIP in Brazilian States


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Conclusions
DEA model is a potential tool to assess the Brazilian NIP that should be explored. As a
multi-input multi-output index, it allows the comparison of states that have diverse
resources and demographic structure and also establishes differing homogeneity goals
to each one, based on their real capabilities. Also, the DEA technique evaluates
homogeneity for various vaccines in the same model, giving an index that considers
the linear combination of all of them. In this way, it is possible to construct an
efficiency index for the first year of life immunization cycle, as the vaccines are
given at different months according to the immunization calendar.
The NIP program can be considered highly efficient as a whole in Brazil, with a mean
DEA efficiency homogeneity index of 93.7 %; mean coverage above 90% for all the
studied vaccines, mean tetravalent abandon around 5, 0 %. The goals for homogeneity
proposed by the model will displace all units towards the best practice frontier and, as
the efficient units could also ameliorate results; new frontiers would be constructed,
giving ways to technological change and a systemic development of the public policy.
References
Atkinson W., Wolfe C., Hamborski J. (2011) Epidemiology and Prevention of Vaccine-
Preventable Diseases. 12th edition. The Public Health Foundation; 2011.
Barreto M.L., Teixeira M.G., Bastos F.I., Ximenes R.A.A., Barata R.A. (2011) Successes
and failures in the control of infectious diseases in Brazil: social and environmental
context, policies, interventions, and research needs. The Lancet; 377: 1877-1889.
Chilingerian J.A., Sherman D. (2004) Health Care Applications - From Hospitals to
Physicians; From Productive Efficiency to Quality Frontiers. In: Cooper WW; Seiford
LM; Zhu J. Handbook on data envelopment analysis. Boston: Kluwer Academic
Publishers.
Hollingsworth B. (2003) Non-Parametric and Parametric Applications Measuring
Efficiency in Health Care Health Care Management Science;6:203-218.
Hollingsworth B. (2008) The Measurement of Efficiency and Productivity of Health
Care Delivery, Health Economics; 17 (10):1107-1128.
ONeill L, Rauner M, Heidenberger K, Kraus M. (2008) A cross-national comparison
and taxonomy of DEA-based hospital efficiency studies. Socio-Economic Planning
Sciences 2008; 42(3):158-189.
Cooper WW, Seiford LM, Tone K. (2007) Data Envelopment Analysis-A
Comprehensive Text with Models, Applications, References and DEA Solver Software.
2nd. Ed. Massachusetts: Springer
Ozcan YA. Health Care Benchmarking and Performance Evaluation: An Assessment
using Data Envelopment Analysis (DEA). International Series in Operations Research
and Management Science. Springer; 2008.
Lins MPE, Lobo MSC, Fiszman R, Silva ACM, Ribeiro VJP. O Uso da Anlise Envoltria
de Dados DEA - para Avaliao de Hospitais Universitrios Brasileiros. Revista
Cincia e Sade Coletiva 2007; 12(4): 985-998.


Proceedings of the 10
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3. A new approach to cross
efficiency evaluation based on
MILP model and measurement
of energy efficiency
Mehmet Guray UNSAL
Gazi University, Science Faculty, Statistics Department, Ankara, TURKEY mgunsal@gazi.edu.tr
(corresponding author)
Hasan BAL
Gazi University, Science Faculty, Statistics Department, Ankara, TURKEY hasanbal@gazi.edu.tr
H. Hasan ORKCU
Gazi University, Science Faculty, Statistics Department, Ankara, TURKEY hhorkcu@gazi.edu.tr
Abstract
DEA has become a very popular method of performance measure, but it still suffers
from some shortcomings. One of these shortcomings is the issue of having multiple
optimal solutions to weights for efficient DMUs. The cross efficiency evaluation as an
extension of DEA is proposed to avoid this problem. Lam (2010) is also proposed a
mixed-integer linear programming formulation based on linear discriminant analysis
and super efficiency method (MILP model) to avoid having multiple optimal solutions
to weights. In this study, we modified MILP model to determine more suitable weight
sets and also evaluate the energy efficiency of OECD countries as an application of
the proposed model.
Keywords: Data envelopment analysis, discriminant analysis, cross efficiency, MILP
model.
Introduction
DEA was first developed by Charnes et al. [3] that seems to be the most popular
method for measuring the efficiency of homogenous decision making units. It become
very popular method which is used in operations research and management science.
The improvements made to the DEA technique have resulted in several new problems
[2]. For example, the issue of unrealistic weights distribution, the weak discrimination
power, and having multiple optimal solutions to weights for efficient DMUs.
Having multiple optimal solutions to weights affects to a great extent the consistency
of operations related to weights cross efficiency method is the most frequently studied
topic in DEA literature. Sexton et al. [13] developed the cross efficiency method to rate
the DMUs. Their technique made use of the cross evaluation scores computed as
related to all DMUs and hence identified the best DMUs [1].

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Despite the extensive use of the cross efficiency method, it has some limitations
arising from the classical DEA. Doyle and Green [5] stated that the non-uniqueness,
i.e. having multiple solutions to optimal weights in the DEA, decreases the usefulness
of the cross efficiency method. Sexton et al. [13] and Doyle and Green [5]
recommended the use of a secondary objective (model) for the cross efficiency
evaluation related to the non-uniqueness of optimal weights in DEA. They proposed
the aggressive and benevolent models for achieving the secondary objective.
See also the following papers with applications of cross efficiency evaluation: Sexton
et al. [16] to nursing homes, Oral et al. [10] to R&D projects, Doyle and Green [4] to
higher education, Green et al. [5] to preference voting, Lu and Lo [9] to economic
environmental performance, Liang et al. [8], Ramon et al. [12], Lam [7], rkc and Bal
[11], Jahanshahloo et al. [6].
For having multiple optimal solutions problem in DEA, Lam [7] proposed a mixed-
integer linear programming formulation based on linear discriminant analysis and the
super efficiency method. In this paper, we modify this model and introduce a new
model to choose suitable weight sets to be used in cross efficiency evaluation.
Lam [7] used a h constant to separate efficient and inefficient DMUs. In the Lam [7]
model, h constant is determined from the super efficiency model. As h is considered
as a variable in our proposed model, it is not necessary to use the super efficiency
model to determine h. Lam [7] used three data scenario to illustrate his model. We also
have used these data scenario for the comparison methods. With this new
modification model, one can compare the efficiency scores and obtain a better picture
of cross efficiency stability with respect to multiple DEA weights. The results obtained
from three different data scenario in the related literature show that proposed model is
compatible with the most used cross efficiency models and make valid contributions
to cross efficiency evaluation.
A New Approach to Cross Efficiency Evaluation Based on the Lam
Model
The cross efficiency method was developed as a DEA extension tool to be utilized for
identifying the best performing DMUs, and for ranking DMUs using cross efficiency
scores that are linked to all DMUs [13,15]. The basic idea of the cross efficiency
method that alleviates the weak discrimination of the classical DEA model can be
explained in two stages: In the first stage, the classical DEA analysis is performed, and
the optimal weights of inputs and outputs are calculated for each DMU. However, the
optimal weights computed by classical DEA have multiple solutions, especially for the
efficient DMUs, and these solutions provide unrealistic weights, i.e., weights with
extreme or zero values. In the second stage, these drawbacks are reduced, and a
suitable set of weights preserving the efficiency values obtained by DEA is selected for
each DMU.
In the first stage, the optimal weights of inputs and outputs are calculated for each
DMU using the classical DEA formulation. Given the results of the first stage, the
weights used by the DMU can be utilized for calculating the peer rated efficiency for

Proceedings of the 10
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International Conference on DEA Brazil2012 24
each of the other DMUs. The peer evaluation score,
, p j
, indicates the efficiency score
for the DMU
j
using the weights obtained by the DMU
p
[15].
,
1
,
,
1
s
r p rj
r
p j m
i p ij
i
u y
v x

=
=
=

. (4)
Lam [7] proposed a mixed-integer linear programming (MILP) formulation based on
linear discriminant analysis and the super efficiency method. The MILP formulation is
summarized as follows:
In the first step, the CCR model given in equation (3) is used to determine the
efficiency ratio for each DMU. Then, based on the efficiency ratios, the DMUs are
classified as either efficient ( E ) or inefficient ( E ).In the second step, an MILP model
is run for each efficient DMU in E. The objective of the MILP model is to separate the
efficient and inefficient DMUs while keeping the efficiency ratio of the DMU under
evaluation to be the highest. The intuition of keeping the efficiency ratio of the DMU
under evaluation as the highest is that the obtained weight set will then reflect the
relative strengths of the efficient DMU under consideration over the other DMUs. All
the obtained weight sets are used to compute cross efficiency ratios for all DMUs. The
efficient DMU under evaluation is expressed thus,
e
DMU . The MILP model proposed
by Lam [7] can be stated as follows:
1
n
j
j
Min z
=


. . s t
1 1
0, ,
s m
r rj i ij j
r i
u y v x M z j E
= =
+


1 1
, ,
s m
r rj i ij j
r i
u y v x M z j E
= =




1
1,
m
i ie
i
v x
=
=

(5)

1
,
s
r re
r
u y h
=


1 1
0 ; 1, , , ,
s m
r rj i ij
r i
u y h v x j n j e
= =
| |
=
|
\ .

.

{ } 0,1 , 1, , ,
j
z j n = .
, 0, 1, , , 1, ,
r i
u v r s i m = = . .
where, is a very small positive number, M is an extremely large positive number,
E is the efficient set which contains all the efficient DMUs, while E contains all the
inefficient DMUs. The value of h is predetermined. In the MILP model proposed by

Proceedings of the 10
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International Conference on DEA Brazil2012 25
Lam [7], constant h is determined by the super efficiency model and in fact, the value
of h is based on the idea of the cross efficiency calculation. In the Lam [7] model, the
constant h is determined from the constraint is given in (6).
1 1
0 ; 1, , , , (6)
s m
r rj i ij
r i
u y h v x j n j e
= =
| |
=
|
\ .

.


If this constraint is organized,

1
1
; 1, , , ,
s
r rj
r
m
i ij
i
u y
h j n j e
v x
=
=
=

.
(7)
is obtained. Lam [7] proposed to determine h with the super efficiency method due to
the difficulty of fractional programming problems. Due to h>1, it seems appropriate to
determine h by the super efficiency method.

The constraint given with (8) was selected instead of this constraint in this study.

1 1
; 1, , , ,
s m
r rj i ij
r i
u y v x h j n j e
= =
=

. (8)
If the constraint given with (8) is organized, (
1
0
m
i ij
i
v x
=

),
1 1
1 1 1
; 1, , ,
m s
i ij r rj
i r
m m m
i ij i ij i ij
i i i
v x u y
h
j n j e
v x v x v x
= =
= = =
=


. (9)

is obtained. If the constraint given with (9) is organized,

1
1 1
1 ; 1, , , ,
s
r rj
r
m m
i ij i ij
i i
u y
h
j n j e
v x v x
=
= =
+ =


. (10)
is obtained.

Here, the value of h is selected as a variable, being h>1. When the constraint given
with (10) is examined, it can be seen that the efficiency ratio (
1 1
s m
r rj i ij
r i
u y v x
= =

)
remains lower than a value higher than 1. In the MILP model, the efficiency ratio is of
a value lower than the value of h (h>1). That is to say, the efficiency ratio is similar to
the MILP model in the model that we propose also. While the model that we propose
determines the threshold value of h itself for the efficiency ratio for the model as well,
the value of h in the MILP model is predetermined with the super efficiency model. As
h is considered as a variable in our proposed model, it is not necessary to use the
super efficiency model to determine h. Besides, our proposed model is not an integer
linear programming. The model suggested is given in the equation (11).

Proceedings of the 10
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International Conference on DEA Brazil2012 26
1
n
j
j
Min d
=


. . s t


1 1
0, ,
s m
r rj i ij j
r i
u y v x d j E
= =
+


1 1
, ,
s m
r rj i ij j
r i
u y v x d j E
= =


1
1, (11)
m
i ie
i
v x
=
=


1
,
s
r re
r
u y h
=


1 1
, 1, , , ,
s m
r rj i ij
r i
u y v x h j n j e
= =
=

.
1 h
0, 1, ,
j
d j n = .

, 0, 1, , , 1, ,
r i
u v r s i m = = . .
where, is a very small positive number, E is the efficient set which contains all
efficient DMUs, while E contains all inefficient DMUs.
Application Study
According to an application study on energy data of OECD countries, we consider
gross domestic product and nonfossil fuel consumption as outputs variables. CO
2

Emission and fossil fuel consumption are the inputs similarly
Ramanathans study [14] in Table 1. We obtained the data set from International
Energy Agency web page http://www.eia.doe.gov. The data belongs to 2008.

Table 1. Outputs and input variables for measuring of
OECD Countries energy consumption and CO
2
emission efficiency
Efficiency Measurement
Approach
Inputs Outputs
Energy Consumption and
CO
2
Emission
(Ramanathan,2005)
CO2 emissions, fossil fuel
energy consumption (FOSS)
Gross domestic product
(GDP), non-fossil fuel
energy consumption
(NFOSS)





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Table 2. Spermans Rank Correlations According to Rankings of DMUs
CCR SUPER CROSS MILP PROPOSED
CCR 1 0.998 0.924 0.973 0.938
SUPER 0.998 1 0.925 0.974 0.946
CROSS 0.924 0.925 1 0.910 0.857
MILP 0.973 0.974 0.910 1 0.942
PROPOSED 0.938 0.946 0.857 0.942 1

Table 3. Efficiency ratios of models for OECD Countries
Country
CCR
Eff.
Ratio
R
a
n
k

Super
Eff.
Ratio
R
a
n
k

Cross
Eff.
Ratio
R
a
n
k

Lam
model
Eff.

R
a
n
k

Prop
osed
Mode


R
a
n
k

AUSTRALIA 0,1073 24 0,1073 24 0,3639 8 0.1556 25 0.0836 25
AUSTRIA 0,3023 12 0,3023 12 0,1929 14 0.3813 13 0.3041 13
BELGIUM 0,3505 11 0,3505 11 0,2523 12 0.5326 10 0.3622 9
CANADA 0,5986 7 0,5986 7 0,4041 6 0.8569 4 0.4582 6
CZECH REPUBLIC 0,1870 20 0,1870 20 0,1272 20 0.2626 19 0.1884 18
DENMARK 0,1613 22 0,1613 22 0,1004 24 0.1945 23 0.1626 21
FINLAND 0,6207 6 0,6207 6 0,3751 7 0.7085 7 0.6475 3
FRANCE 1 3 2,3988 2 0,8757 1 1.9039 1 1.1272 1
GERMANY 0,5910 8 0,5910 8 0,3567 9 0.7322 5 0.3724 7
GREECE 0,0658 28 0,0658 28 0,0466 27 0.0979 27 0.0676 28
HUNGARY 0,2091 18 0,2091 18 0,1237 22 0.2365 21 0.1991 17
IRELAND 0,0719 27 0,0719 27 0,0444 28 0.0854 28 0.0731 26
ITALY 0,1788 21 0,1788 21 0,1248 21 0.2660 18 0.1441 22
JAPAN 1 3 1,0875 4 0,5257 3 0.7089 6 0.3442 10
KOREA 1 3 2,1397 3 0,5106 5 0.5992 9 0.3182 11
LUXEMBOURG 0,0595 29 0,0595 29 0,0253 29 0.0521 29 0.0511 29
MEXICO 0,2202 17 0,2202 17 0,1495 18 0.3133 16 0.1682 20
NETHERLANDS 0,0898 25 0,0898 25 0,0745 25 0.1618 24 0.0937 24
NEW ZEALAND 0,3022 13 0,3022 13 0,1827 15 0.3451 14 0.3150 12
NORWAY 0,4685 10 0,4685 10 0,2814 11 0.5304 11 0.4991 5
POLAND 0,0734 26 0,0734 26 0,0571 26 0.1234 26 0.0698 27
PORTUGAL 0,2038 19 0,2038 19 0,1283 19 0.2507 20 0.2054 16
SLOVAK REPUBLIC 0,2531 15 0,2531 15 0,1528 17 0.2883 17 0.2649 14
SPAIN 0,2726 14 0,2726 14 0,2112 13 0.4570 12 0.2580 15
SWEDEN 1 3 2,0432 1 0,6001 2 1.1419 2 1.1082 2
SWITZERLAND 0,5568 9 0,5568 9 0,3353 10 0.6320 8 0.5872 4
TURKEY 0,1221 23 0,1221 23 0,1017 23 0.2208 22 0.1281 23
UNITED KINGDOM 0,2356 16 0,2356 16 0,1530 16 0.3212 15 0.1690 19
USA 1 3 4,0592 5 0,5141 4 0.9146 3 0.3651 8




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Table 4. Outputs and inputs weights obtained from Lams MILP
and proposed model (for efficient DMUs)

The proposed model produces far fewer zero weights than Lams MILP. As pointed
out by Cooper et al [16], it is better to use weight sets which have more balanced
virtual weights than extreme virtual weights in measuring the performance of the
DMUs in the DEA. The results of application study are listed in Table 2-4. All of the
models have significant and high correlation coefficients between each other. This
solution is lead us these models have same usefulness in ranking of DMUs.
Furthermore, the proposed model has an ability to find of value of h by itself. Another
significant advantage of our modified MILP model is that it can effectively reduce the
number of zero weights for inputs and outputs as seen in Table 3.
Conclusions
Lam [7] proposed a mixed-integer linear programming (MILP) formulation based on
linear discriminant analysis and super efficiency method. In this paper, we modify this
model to choose suitable weight sets to be used in cross efficiency evaluation. The
weight sets obtained from the proposed model are suitable for cross-evaluation
because they reflect the different strengths of the efficient DMUs. The proposed model
produces far fewer zero weights than Lams MILP. The results are obtained from
energy consumption and CO
2
emmission efficiency of OECD Countries.
References
[1] T.R. Andersen, K.B. Hollingsworth, L.B. Inman, (2002) The Fixed Weighting Nature
of a Cross Evaluation Model, J. Prod. Anal., 18 (1) 249255.
[2] H. Bal, H.H. rkc, S. elebiolu, (2010) Improving the Discrimination Power and
Weight Dispersion in the Data Envelopment Analysis, Comput. Oper. Res., 37 (1) 99
107.
[3] A. Charnes, W.W. Cooper, E. Rhodes, (1978) Measuring the Efficiency of Decision
Making Units, Eur. J. Oper. Res., 2 429444.
[4] J.R. Doyle, R. Green, (1994) Efficiency and Cross Efficiency in Data Envelopment
Analysis: Derivatives, Meanings and Uses, J. Oper. Res. Soc., 45 (5) 567578.
[5] R. Green, J.R. Doyle, W. Cook, (1996) Preference voting and project ranking using
DEA and cross-evaluation, Eur. J. Oper. Res., 90 (3) 461472.

MODELS
COUNTRIES u1 u2 v1 v2 h u1 u2 v1 v2 h
FRANCE 0 0,0481 85,3197 0,0153 2,35 0 0,0262 19,8738 0,0185 1,2820
JAPAN 0 0,0445 797,6734 0,0033 2,35 0 0,0126 1,5746 0,0120 1
KOREA 0 0,0387 427,6736 0,0023 2,35 0,0001 0,0259 38,4121 0,0113 46,0388
SWEDEN 0 0,0348 0 0,0304 2,35 0 0,0289 6,9926 0,0262 1,9457
USA 0 0,3683 5434,7830 0 2,35 0 0,0675 704,6617 0,0102 1
LAM MODEL PROPOSED MODEL

Proceedings of the 10
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International Conference on DEA Brazil2012 29
[6] G.R. Jahanshahloo, L.F. Hosseinzadeh, Y. Jafari, (2011) R. Maddahi, Selecting
symmetric weights as a secondary goal in DEA cross-efficiency evaluation, Appl. Math.
Model., 35, 544549.
[7] K.F. Lam, (2010) In the determination weight sets to compute cross-efficiency ratios
in DEA, J. Oper. Res. Soc., 61 134143.
[8] L. Liang, J. Wu, W.D. Cook, J. Zhu, (2008) Alternative secondary goals in DEA
cross-efficiency evaluation, Int. J. Prod. Eco., 113 (2) 10251030.
[9] W.M. Lu, S.F. Lo, (2007) A closer look at the economic-environmental disparities
for regional development in China, Eur. J. Oper. Res., 183 (2) 882894.
[10] M. Oral, O. Kettani, P. Lang, (1991) A methodology for collective evaluation and
selection of industrial R&D projects, Manage. Sci., 37 (7) 871885.
[11] H.H. rkcu, H. Bal, (2011) Goal programming approaches for data envelopment
analysis cross efficiency evaluation, Appl. Math. Comput., 218 346-356.
[12] N. Ramn, J.L. Ruiz, I. Sirvent, (2010) On the choice of weights profiles in cross-
efficiency evaluations, Eur. J. Oper. Res., 207 (3) 15641572.
[13] T.R. Sexton, R.H. Silkman, A.J. Hogan, (1986) Data Envelopment Analysis:
Critique and Extension. In: Silkman R.H. (Ed.), Measuring Efficiency: An Assessment of
Data Envelopment Analysis, 32. Jossey-Bass, San Francisco 73-105.
[14] R. Ramanathan, (2005) An analysis of energy consumption and carbon dioxide
emissions in countries of the Middle East and North Africa, Energy, 30 28312842.
[15] T.R. Andersen, K.B. Hollingsworth, L.B. Inman, (2002) The Fixed Weighting
Nature of a Cross Evaluation Model, J. Prod. Anal., 18 (1) 249255.
[16] W.W. Cooper, J.L. Ruiz, I. Sirvent, (2007) Choosing Weights From Alternative
Optimal Solutions of Dual Multiplier Dual Models in DEA, Eur. J. Oper. Res., 180 443
458.

Proceedings of the 10
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4. An effectiveness analysis of
different techniques for
development of IT software
projects
Marco Mendes
School of Economics - FACE - Management Department UFMG, marco-mendes@ufmg.br
Ana Lcia Miranda Lopes
School of Economics - FACE - Management Department UFMG, analopes.ufmg@gmail.com
Rajiv Banker
Fox School of Business and Management Temple University, banker@temple.edu
Abstract
Software development best practices claim to reduce IT projects risks and deliver
better and efficient software products. Yet widely accepted on industry, these
techniques are the subject of intense debate in academia. Objective: This paper
presents a quantitative analysis of the impact of a set of software development
techniques on the technical efficiency of software projects. A study is conducted on
105 software development projects for efficiency analysis of effort, time elapsed,
productivity and defect density. The following software practices are evaluated:
capability maturity models like CMMI, requirements elicitation techniques, design and
architecture techniques, test techniques, project management techniques, business
process management use and case tools adoption. Method: Benchmarking is
performed using efficient frontier analysis with DEA BCC input oriented. Efficiency
scores among software project groups are compared using DEA based hypothesis
tests. Results: No single software engineering technique could explain an increase in
overall performance in IT projects. Yet, we find some evidences that IT firms are more
efficient than other firms types when delivering software projects. Conclusion: Results
emphasize the importance of recognizing that optimal management techniques
depend on the characteristics of the software development project, organization type
and its sociotechnical environment.
Keywords: Software Economics, DEA BCC, Information Systems, CMMI, Software
Architecture
Introduction
Information technology (IT) has been used for over 50 years as a plausible instrument
for increasing efficiency in firms business processes. Several software engineering best
practices such as capability maturity models, project management techniques,
requirement, design and test techniques are proposed instruments to reduce software

Proceedings of the 10
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development risks and to deliver better products. Although the value of these
practices is widely accepted in industry, formal analysis of its benefits has been the
subject of great debate in academia.
In this context, this paper promotes a discussion of the influence of software
development practices on technical efficiency of software projects. The term technical
efficiency is used according to Farrell [1] and it means the product results
maximization from a predetermined set of inputs. For example, if a set of software
project of the same size and effort reports different defect densities the projects with a
lower defect density are classified as more efficient. The key question posed in this
study is: the use of recognized software engineering practices could yield superior
project performance? Economic efficiency has great significance and encourages
managers in directorial search for techniques that can yield software products in less
time and effort or with fewer defects.
The paper is organized as follows. Section 2 presents related work in IT projects
technical efficiency. Section 3 presents the DEA based methodology and DEA based
hypothesis test for comparison of groups of IT projects. Section 4 presents the results
and discussion of the experiment, followed by conclusion in section 5.
Related Work
A longitudinal study conducted since 1985, compiled the report Chaos Manifesto [2],
indicates that the majority of IT projects present efficiency problems regarding the
quality as perceived by its users, project deadlines and costs. In a meta-analysis of
investments in IT services Brynjolfsson [3] studied the IT productivity paradox, arguing
that the use of IT often does not generate the expected returns on investment. The
same author presents in the later work efficiency factors when information technology
is linked to the innovation of business processes [4]. Since the 70s, software costs
exceed hardware costs in IT in a range of up to 5:1 [5] [6]. Currently this ratio exceeds
10:1 and continues to grow. With respect to the unit of analysis for software projects,
several investigations have been conducted to determine factors that guide economic
efficiency. Factors related to product size, teams, technologies and construction
process are more accepted in the literature. These aspects are discussed in the classic
book The Mythical Man-Month [7] and its elements already indicate diseconomies of
scale. Early econometric models such as SLIM and COCOMO II [6] are seminal
references in determining these factors and also presents evidence of diseconomies for
large projects.
Yet classical analyses suggest decreasing returns to scale for software projects, other
authors present divergent arguments [8]. Banker and Kemerer [9] analysed several IT
project databases and noticed that some of them exhibit economies of scale. The same
authors in subsequent work [10] present similar evidence in the context of software
maintenance and other projects database. Over the past years, investigations by other
authors show evidence of varying scales in projects [11].
Academic software economics literature encompasses many quantitative methods of
analysis. Pioneering work in the 70s and 80s were based simply on multiple linear
regression methods. A systematic review of measurement and prediction of
productivity of software projects analyses the main quantitative methods in use in 38

Proceedings of the 10
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selected papers [12]. The author indicates that methods like DEA (Data Envelopment
Analysis), Bayesian networks and discrete event simulation are promising.
This paper investigates the effects of some software engineering practices on the
performance of software projects. We analyse the following practices:
Capability maturity models, like SEI CMMI. These maturity models claim to
deliver better results.
Software development life cycle techniques, like requirements, design,
architecture and test techniques.
Business Process Management techniques. Business Process Management is
supposed to deliver better IT and business alignment.
Case tools adoption. Case tools are used to automate modelling and reduce
design errors. Again, their use is expected to improve project performance.
Project planning and monitoring techniques. Use of managing techniques and
standards, like PMBOK, is supposed to help project performance.
Methods
This paper investigates the hypothesis that software development best practices leads
to better project outcomes.
To investigate this hypothesis, it is necessary to understand the relationships of
efficiency in software projects and nature of returns to scale. Equation (1) is usually
used to establish the relative efficiency of software development projects from the
correlation between the functional size (lines of code implemented, function points,
tables, databases) and their effort in hours.
=

(1)

< 1 o
= 1
> 1


Methods such as COCOMO II use this equation as basis. In COCOMO II, the a term is
a 14 factor composite. Although COCOMO II does not use modern software
development terminology, some of its attributes are linked to aspects of software
design attributes such as Application of software engineering methods, Software
Complexity or Required Software Reliability of the Product.
If we assume that terms a and b are known to a certain project database in a firm, it is
expected that similar size projects have similar efforts. In the presence of different
efforts we can compare the efficiency of these projects. Projects that present lower
efforts when compared to another project of similar size are the one that have better
economic efficiencies. However, examination of project results through a single
outcome (univariate analysis) such as effort in hours can be deceptive. Quality
measures, effort and time elapsed should be analysed together.
We understand that the efficiency of a project should be analysed from a set of
technical and managerial results (multivariate analysis). In the design of the
experiment we used four variables to analyse software projects efficiency:

Proceedings of the 10
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International Conference on DEA Brazil2012 33
Effort, defined as the total number of hours spent on the project.
Time Elapsed, defined as the number of months spent on the project.
Software functional size defined as function points as defined by IFPUG.
Defect density, defined by the ratio of the number of defects by the functional
size of the software. Defect density is a popular quality measure on IT projects.
See equation (2)
(2)
When we compare two projects, ceteris paribus, reduced effort, reduced time elapsed,
reduced defects and greater functional size suggests better efficiency.
The efficiency function in our experiment is not known, i.e., we make no assumption
about the nature of this function (non-parametric function). To compare diverse
software projects in a problem of multiple inputs and outputs we used DEA BCC
(Data Envelopment Analysis) method.
The experiment consisted in the comparative analysis of a set of software projects.
The database used was ISBSG Release Date v11, composed of 5052 software projects.
The data of the projects were selected from the following criteria:
Evaluation of data quality of a project is sound and has been formally evaluated
by experts from ISBSG. (Date Quality Rating = A and B).
Software project defects were reported.
Functional size counting technique respects Function Point technique as defined by
IFPUG (IFPUG Count = Approach) and function points project size in the range
(200, 2000).
Development of new products (Development Type = New development).
Maintenance and reconstruction projects were not evaluated in this work.
One hundred and five (105) projects met these criteria and were used for efficiency
comparison.
Our DEA model has two inputs (Effort and Elapsed Time) and two outputs
(Functional size and Defects). Since software defects is an undesirable output, we
modelled it using the reciprocal multiplicative approach [13]. In this approach, the
undesirable output is modeled as being desirable: f(uik)=1/uik, where uik is one of
the elements of the matrix U of the undesirable outputs i of the decision making unit
k.
In our work, we are interested in the comparison of a group of IT projects which used
a specific technique and a group of IT projects which didnt use this specific
technique. We use DEA-based hypothesis tests for comparing two groups of decision
making units, according with [14]. We use the modified T-Test procedure for
comparing the equality of means of two populations random variables.

Proceedings of the 10
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DEA results are considered robust if the number of DMUs compared is threefold
higher than the sum of inputs and outputs. Since we have 2 inputs and 2 outputs, our
database sample suffices.
Results and discussions
Table 01 shows, for each software project technique, the technical average efficiency
scores (mean and standard deviation values).



Software Project Technique
Technical
Efficiency Scores

Mean
Value
Standard
Deviation
CMMI 43.47 13.44
Business Process Management/BPM 89.19 18.83
Business Project Modeling 63.91 27.46
Project Management Techniques 46.76 18.99
Software Requirement Techniques 45.79 18.33
Software Design Techniques 47.04 16.96
Software Test Techniques 42.26 13.18

Table 02 shows the technical efficiency scores breakdown for firm type.



Firm type
Technical
Efficiency Scores
Mean
Value
Standard
Deviation
IT company 79.26 11.58
Banking company 71.42 20.20
Telecom company 47.18 3.29


Proceedings of the 10
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International Conference on DEA Brazil2012 35
We first compared groups of software projects to check if a specific technique could
indicate superior efficiency technical performance.
A t test failed to reveal a statistically reliable difference between the mean number of
CMMI projects ( = 43.47, s = 13.44) and non-CMMI projects, t(3) = -3.379, p < .05,
= .05.
A t test succeed to reveal a statistically reliable difference between the mean number
of BPM projects ( = 89.19, s = 18.83) and non-BPM projects, t (3) = 3.15, p < .05, =
.05.
A t test failed to reveal a statistically reliable difference between the mean number of
projects with process modeling techniques ( =63.91 s = 27.46) and projects without,
t (16) = 0.66, p < .05, = .05.
A t test failed to reveal a statistically reliable difference between the mean number of
projects with formal project management techniques ( =46.76 s = 18.99) and projects
without, t (35) = -4.03, p < .05, = .05.
A t test failed to reveal a statistically reliable difference between the mean number of
projects with formal planning techniques ( =45.79 s = 18.33) and projects without,
t (33) = -4.37 p < .05, = .05.
A t test failed to reveal a statistically reliable difference between the mean number of
projects with formal software design techniques ( =47.04 s = 16.96) and projects
without, t (32) = -4.23 p < .05, = .05.
A t test failed to reveal a statistically reliable difference between the mean number of
projects with formal test techniques ( =42.26 s = 13.18) and projects without,
t (17) = -5.55 p < .05, = .05.
No single software engineering technique could deliver better results. BPM projects,
however, presented some evidences of superior performance.
In the analysis of firm types, Telecom and Banking companies failed to pass on the t-
test. IT companies, however, passed on the t-test. Superior technical performance of
IT firms projects can be partially explained by the economic drivers of this type of
organization. IT projects are in the core value chain of these organizations. IT projects
outcomes determine the success or failures of this type of organization and therefore
are continuously monitored and improved by managers and engineering teams.
Conclusions
Quantitative analysis of projects software can be better studied with multivariate
analysis methods such as DEA. Results emphasize the importance of recognizing that
optimal management techniques depend on the characteristics of the software
development project, organization type and its sociotechnical environment. IT
companies presented better results and non-IT companies, which can show how the
socio-technical can influence the technical performance of projects.


Proceedings of the 10
th
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References
M. J. Farrell, The Measurement of Productivity Efficiency. Journal of Royal Statistical
Society, 1957.
Standish Group, CHAOS Manifesto 2011, 2011.
E. Brynjolfsson, The productivity paradox of information technology,
CommunIcations of ACM, vol. 36, no. 12, pp. 6677, 1993.
W. T. Lin and B. B. M. Shao, The business value of information technology and
inputs substitution: the productivity paradox revisited, Decis. Support Syst., vol. 42,
no. 2, pp. 493507, Nov. 2006.
L. H. Putnam, A General Empirical Solution to the Macro Software Sizing and
Estimation Problem, IEEE Transactions on Software Engineering, pp. pp. 345361, Jul.
1978.
B. W. Boehm, Software Engineering Economics, 1st ed. Upper Saddle River, NJ, USA:
Prentice Hall PTR, 1981.
F. P. Brooks,Jr., The Mythical Man-Month: Essays on Softw, 1st ed. Boston, MA, USA:
Addison-Wesley Longman Publishing Co., Inc., 1978.
Kitchenham BA, The question of scale economies in software-why cannot researchers
agree?, Information and Software Technology, 2002. .
R. Banker and C. F. Kemerer, Scale economies in new software development, IEEE
Trans Software Eng, vol. 15, no. 10, pp. 11991205, 1989.
R. D. Banker, H. Chang, and C. F. Kemerer, Evidence on economies of scale in
software development, Inf Software Technol, vol. 36, no. 5, pp. 275282, 1994.
C. Comstock, Z. Jiang, and J. Davies, Economies and diseconomies of scale in
software development, Journal of Software Maintenance and Evolution: Research and
Practice, vol. 23, no. 8, pp. 533548, 2011.
K. Petersen, Measuring and predicting software productivity: A systematic map and
review, Inf. Softw. Technol., vol. 53, no. 4, pp. 317343, Apr. 2011.
[13] E. Gomes and M. Lins, Modelling undesirable outputs with zero sum gains
data envelopment analysis models, Journal of the Operational Research Society, pp.
616623, 2008.
[14] R. D. Banker, N. Natarajan, N, and Z. Zeng, DEA-based hypothesis tests for
comparing two groups of decision making units., European Journal of Operational
Research, 2010.
Acknowledgements
We authors would like to thank ISBSG for making available the ISBSG R11 data.

Proceedings of the 10
th
International Conference on DEA Brazil2012 37
5. An IDEA model to evaluate
the overall performance of
Buyer-Supplier
Zahra Yousefi
Department Mathematics, Islamic Azad University, Science and Research Branch, Tehran, Iran,
sarir.yousefi@yahoo.com
Mohsen Rostamy-Malkhalifeh
Department Mathematics, Islamic Azad University, Science and Research Branch, Tehran, Iran
mohsen_rostamy @yahoo.com
Somayeh Mamizadeh
Department Mathematics, Islamic Azad University, Central Tehran Branch, Tehran, Iran
somayeh_mamizadeh@yahoo.com
Abstract
After proceeding with international management, enterprises have to face the
challenge of Buyer-Supplier mainly because of the paid change in the business
environment and severe competition I market and customers diverse demand. In some
enterprise we may come across imprecise data such as interval, ordinal and fuzzy
data. And also for some Buyer-Suppliers, there are indexes that its decrease and or
increase are not possible. These indexes calls non-controllable or somewhat
controllable. We consider evaluating of Buyer-Supplier so that parts of inputs are non-
controllable variable. We focus on the case when imprecise input-output data are
represented by intervals.
Keywords: Imprecise Data Envelopment Analysis, Performance evaluation, Buyer-
Supplier
Introduction
The organization is customer-oriented organization, which aims to anticipate customer
demand in the issues that are most valuable to them. Customer service organization
are always the cornerstone of thinking and planning organizations. In the world
today that quality is driven customer-oriented, customer focus is the foundation of all
commercial activities. The definitive impact of the supply chain on enterprises
performance has been reported from many industries. A supply chain consists of
organizations working in the entire supply chain. The supply chain performance
evaluation problem is one of the most comprehensive strategic decision problems that
need to be considered for long-term efficient operation of the whole supply chain [2].
Our approach is evaluating of the overall performance in Buyer-Supplier relationships
through the measurement of intensity and effectiveness in a supply chain: we use
evaluation tools such as Imprecise Data Envelopment Analysis (IDEA). In the

Proceedings of the 10
th
International Conference on DEA Brazil2012 38
conventional DEA model, input and output are assumed to be exact. In recent years,
various applications of DEA, there are many input and output values is unlimited.
Imprecise data can be probabilistic, interval, ordinal, qualitative, or fuzzy. Therefore,
some papers were presented on the theoretical development of this technique with
interval data, of which we can name Inuiguchi (2011) [1]. Thus, we presented an IDEA
model with intervals are shown and we consider evaluating of Buyer-Supplier so that
parts of inputs are non-controllable variable. In addition, by compared with other
Buyer-Suppliers, the evaluated Buyer-Supplier can be identified as efficient or
inefficient. Application of classical DEA regards the supply chain as a black box and
considers only the inputs from the beginning of the upstream members and final
outputs at the very end of downstream members in the performance evaluation. Thus,
those intermediate product are ignored. Therefore, the performance scores obtainable
from the original approaches will overrate real performance of supply chain. In this
paper we examine the supply chain to the black box.
Methods
Assume that there are n supply chains (SCs) each of them producing S outputs by
consuming M inputs so that D represented controllable variable. The correspondences
between Q
1
and (Q
11
,Q
12
,Q
13
,Q
14
) and between Q
2
and (Q
21
,Q
22
,Q
23
,Q
24
) are shown in
Table 1.




Figure1: A supply chain

Therefore, Buyer-Supplier supply chain performance assessment model using the
following model:
Buyer-Supplier
X Y

Proceedings of the 10
th
International Conference on DEA Brazil2012 39

Q
1
Q
11
Q
12
Q
13
Q
14

L R R L
N R L L R
L L L R R
R R R L L
Q
1
Q
21
Q
22
Q
23
Q
24

R L L R
N L R R L
L L L R R
R R R L L
Table 1: The correspondence between Q
i
and (Q
i1
, Q
i2
, Q
i3
, Q
i4
), i=1,2
1
11 12
11 12
13 14
1

s.t.
if Q
X i D
X i D
Y r 1,...,
if Q
X , X i D
X , X
Q Q
i iq
Q Q
i iq
Q Q
r rq
L L R R
i iq i iq
L L R
i iq i
Min
LR
x
x
y s
LR
x x
x x



=
=


2
1 1
21 22
1 1
21 22
1 1
23 24
i D
Y , Y r 1,...,
if Q /
X z z i D
X z z i D
Y z z
R
iq
L L R R
r rq r rq
Q Q
i i iq i
Q Q
i i iq i
Q Q
r r rq r
y y s
L R
x
x
y



+ +

2
1 1 2 2
1 1 2 2
2 2 1 1
r 1,...,
if Q /
X z z , X z z i D
X z z , X z z i D
Y z z , Y z z
L L R R
i i iq i i i iq i
L L R R
i i iq i i i iq i
L L R R
r r rq r r r rq r
s
L R
x x
x x
y y





+ + + +
=
=



{ }
1 2 1 2
r 1,...,
0 , e 1 , 0
z , z , z , z 0,1.

T
q
i i r r
s

+ +
=
= =


Proceedings of the 10
th
International Conference on DEA Brazil2012 40
Results and discussions
The proposed approach, the Buyer-Supplier performance is evaluated both
qualitatively and quantitatively.
Conclusions
Today, enterprises have found that they can buy them increasingly effective in
increasing the efficiency and effectiveness, and therefore buying practices have
changed and try to choose an suitable manner so that they can meet its strategic
objectives and purchasing. To accomplish of this subject we have to seek suitable
suppliers and strategic and related with them to attain competitive advantages. To
achieve this goal, the implementation of the supply chain is necessary.
References
Inuiguchi M., Mozioshita F., (2011) Qualitative and quantitative data envelopment
analysis with interval data, Annals of operation research, DOI 10.1007/s10479-011-
0988-y.
Yang F., Wu D., Liang L., Bi G.,& Wu D.D., (2009) Supply chain DEA: Possibility set
and performance evaluation model, Annals of operation research, DOI
10.1007/s10479-008-0511-2.



Proceedings of the 10
th
International Conference on DEA Brazil2012 41
6. Assessing Performance of
Organized Pharmacy Retail
Stores using Data
Envelopment Analysis
G N Patel
gn.paptel@bimtech.ac.in
Smiti Pande
smriti.pande@bimtech.ac.in
Abstract
The purpose of the study is to evaluate the performance of a chain of organized
pharmacy retail stores using a new enhanced technique, DEA. The study focuses on
evaluation of technical and cost efficiency. Technical efficiency does not take into
account the substitution possibilities between inputs and therefore we applied cost
and allocative efficiency models. To illustrate the DEA models discussed above we are
focusing upon a real-world problem of revival of loss making retail stores of an
organization which deals in pharmacy retailing. This study uses secondary data
collected over a time period of three years from a pharmacy retail chain located in
National Capital Region. This organization has expanded itself into a chain of 46
pharmacy retail stores over a time span of three years. The study is deemed to be
helpful to the retail managers in providing a framework for performance evaluation
and enabling the pharmacy retail stores in gaining a competitive edge over the
increasing competition faced by the emerging organized pharmacy retail market in
India.
Keywords: Pharmacy, Retailing, Performance Evaluation, Data Envelopment Analysis
Introduction
In the current Indian pharmacy retailing scenario, the sector is mainly dominated by
unorganised players, which comprises of, the neighbourhood chemist stores owned
by small families. The rising affordability, increased consciousness and willingness to
spend has not only given rise to the health and pharmacy retailing business of the
society but has also demanded for a big transition. Therefore, the challenge faced by
the organised sector is to position itself in such a way that they can be easily
differentiated from the small and unorganised retailers of pharmacy sector. Currently
there is not much differentiation in the offerings of organised players but at the same
time, organised players are a big threat for dominating unorganised sector (Pande and
Patel, 2011). Technology and cost are the two wheels that drive a business and
therefore play a crucial role in running an efficient business. A considerable amount of
attention received by the retail efficiency research is understandable but the scarcity of

Proceedings of the 10
th
International Conference on DEA Brazil2012 42
research in the area of cost efficiency evaluation is a matter of apprehension. This is
because companies are always eager to enquire, how effectively and efficiently their
resources that incur huge costs are being utilized (Pande and Patel, 2011). As per the
authors knowledge, the contribution of this paper to retailing research is based on the
application of allocation models in order to show how DEA can be used to identify
not only the technical efficiency but also the allocative efficiency where, just
reallocation of inputs can improve the overall performance.
Theoretical Framework
According to Farrell (1957), cost efficiency gets decomposed into technical and
allocative efficiency. The cost minimization problem and its decomposition can be
diagrammatically represented as-

Figure 1: Cost efficiency and its decomposition

Now, to evaluate the performance of A we can use Farrell measure of technical
efficiency * (Refer Cooper et. al., 2007 for details) which is represented in the ratio
form, in the following manner-
1
) , (
) , (
0
A O d
B O d
(1.1)
The optimal point C is obtained from the following LP (1.2) (Refer Ray, 2004 for
details)
j j
n
j
j
n
j
r j rj
n
j
i j ij
m
i
i i
U L y y x x t s x w

= = = =
0 , , , . . , min
1 1
0
1 1


Proceedings of the 10
th
International Conference on DEA Brazil2012 43
where, m i w
i
.... 2 , 1 , = is the unit price for
m
x x x .... ,
2 1
respectively. Based on the
optimal solution (
* *
, x ) derived from the above linear programming the cost
efficiency of a DMU can be calculated. Allocative efficiency () is represented by
determining the relative distance of B and D to obtain the following ratio-
1
) , (
) , (
0
B O d
D O d
(1.3)
Furthermore, another measure that is referred as cost efficiency () is given as-

1
) , (
) , (
0
0
*
=
wx
wx
A O d
D O d
(1.4)
This is a measure of extent to which the originally observed values at A have fallen
short of achieving the minimum cost. To put this in a way that relates all three
efficiency concepts to each other, we have - * =
(1.5)

Data and Variables
Data Envelopment Analysis requires identification of input and output variables. For
the purpose of this study, input and output variables are identified based on the
objectives of the company and also the literature reviewed.
Table 1: Inputs and Outputs
Inputs Authors
Rent paid Joo et al. 2009
Store Size Moreno, 2008; Barros and Alves, 2003; Donthu and Yoo,
1998
Wages Moreno 2010; Joo et al. 2009
Inventory Cost Donthu and Yoo, 1998; Barros and Alves, 2003
Marketing expenses Donthu and Yoo, 1998
Maintenance expenses Moreno 2006
Other day-to-day expenses Joo et al. 2009; Barros and Alves 2003

Outputs Authors
Sales Joo et al. 2009; Barros 2006; Moreno 2006; Seller-Rubino &
Mas-Ruiz 2006; Barros and Alves 2003; Donthu and Yoo
1998
Footfalls

Here, the relative unit costs of store for each DMU were also recorded in the
following manner: Per unit cost of store size = Total rent / Store size. The other input
variables such as maintenance, marketing and other day-to-day expenses are clubbed

Proceedings of the 10
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under a single heading named operating expenses. The relative unit cost for
operating expenses, inventory cost and wages to the employees remains equals to 1
for each DMU.
Result and Discussion
Firstly, we applied the BCC model (Cooper et. al. 2007). This model includes two
outputs: sales and footfalls and four inputs: Wages of the employees, store size,
inventory cost and operating expenses. Secondly, we applied the linear programming
equation (1.2) to evaluate the cost efficiency of each DMU. This model records the
relative unit costs of store size for each DMU, apart from the inputs and outputs
considered in the previous model. Third, the study also evaluates the allocative
efficiency of each DMU by using the equation (1.5). The scores of three different
efficiencies obtained for each DMU for three different years are as shown in Table 2
(refer Appendix A). From the results obtained it can be observed that, the DMUs that
turn out to be the most excellent or best performers are DMU 1, 3, 6, 19, 30 and 43
with all their efficiency scores equal to 1 since their inception. Apart from these best
performers there are some DMUs with their technical efficiency equal to 1, but, these
DMUs do not have the best cost based measures. For example: DMU 2, 5 in the year
2009. There are some that are neither technically efficient nor posses a good cost
based measure, like: DMU 4, 7 in 2009. These set of DMUs also includes the ones that
have worst allocative efficiency scores for example DMU 13, 14 and 15 in all the three
years. All such cases identifies the need of reallocation of resources. Lastly, there are
few that are neither technically efficient nor have efficient cost based measures but
have attained high allocative efficiency, for example: DMU 4 and 29 in 2010.
\This case is a part of a thesis wherein in order to clearly examine the determinants of
efficiency, we applied Tobit regression model regressing the BCC efficiency scores as
dependent variable. As per DEA literature Coelli (1998), Tobit regression model is
suitable when the dependent variable is censored. The Tobit regression model is
represented as-
i i
i i i i i i i
Location
Age size Store enses Operating Footfalls Sales


+ +
+ + + + + =
) (
) ( ) ( ) exp ( ) ( ) (
6
5 4 3 2 1

Where,
i
is the efficiency score for the retail store i computed from the BCC model
with categorization of age and location as non-discretionary variables.
i i i i
size Store enses Operating Footfalls Sales , exp , , are sales, footfalls, operating
expenses and store size of the
th
i retail store. The non-discretionary variables
i i
Location and Age are part of the thesis work and are not considered in this cost
efficiency section.
The
2
test statistics (=161.7) with six degrees of freedom associated with p value
(=2.5844x10
-32
) shows that the model is a good fit for the data. Also we find that the
value of constant 2 (e
-2.49479751
= 0.082513157) from the Tobit model is much less that the
standard deviation of
i
(=0.1676) which again shows that the models appears to fit

Proceedings of the 10
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International Conference on DEA Brazil2012 45
the data well. From the results obtained using Tobit model we find that, footfalls,
sales, operating expenses, store size are significant contributors to the efficiency of
retail store. For an increase in footfalls and sales the efficiency of the retail store will
increase by 0.00164001 and 0.00105268 respectively. However, the sign of operating
expenses and store size is negative as expected. This indicates that the efficiency of a
retail store will fall by (-0.00465915) and (-0.00094193) for an increase in operating
expenses and store size respectively. The age and location of a store were not found
to be significant contributors to the efficiency.
Managerial Implications and Conclusions

There is a likelihood of huge reductions in the inputs and also, reallocation of inputs
as discussed above in various cases. Second, we observe that the older the store, the
higher is the cost efficiency. For majority of the stores, the analysis shows huge
reduction and reallocation possibilities to attain the optimal input mix. Third, we can
state that allocative models better describes the performance of chain of pharmacy
retail stores because it brings number of inputs, costs and right mix of inputs
altogether. If all the three considerations are well taken care of by retail managers, it
may lead to enhancement of the overall performance.
References:
Banker, R. D., Charnes, A. and Cooper, W.W. (1984) Some Models for Estimating
Technical and Scale Inefficiencies in Data Envelopment Analysis, Management
Science, No. 30, pp.1078-1092.
Barros, C.P. and Alves, C.A. (2003) Hypermarket retail store efficiency in Portugal,
International Journal of Retail & Distribution Management, Vol. 31, No. 11, pp.549-560.
Barros, C.P. (2006) Efficiency measurement among hypermarkets and supermarkets
and the identification of the efficiency drivers, International Journal of Retail &
Distribution Management, Vol. 34, No. 2, pp. 135-154.
Charnes, A., Cooper, W.W. and Rhodes, E. (1978), "Measuring the Efficiency of
Decision Making Units, European Journal of Operational Research, Vol. 2, 1978,
pp.429-444.
Coelli, T.J., Rao, P. And Battese, G.E. (1998), An Introduction to Efficiency and
Productivity Analysis, Kluwer Academic Press, Dordrecht
Cooper, W.W., Seiford, L.M. and Tone, Kaoru (2007) Data Envelopment Analysis: A
comprehensive text with models, applications, references and DEA-Solver Software,
Springer Science + Business Media, LLC.
Donthu, Naveen and Yoo, Boonghee (1998) Retail Productivity Assessment Using
Data Envelopment Analysis, Journal of Retailing, Vol. 74(1), pp. 89-105

Farrell, M.J. (1957) The Measurement of Production Efficiency, Journal of the Royal

Proceedings of the 10
th
International Conference on DEA Brazil2012 46
Statistical Society A, 120, pp.253-281
Joo, Seong-Jong, Stoeberl, P.A. and Fitzer, Kristin (2009) Measuring and
benchmarking the performance of coffee stores for retail operations, Benchmarking:
An International Journal, Vol. 16, No. 6, pp. 741-753
Moreno, Justo de Jorge (2006) Regional regulation analysis of performance in Spanish
retailing, International Journal of Retail & Distribution Management, Vol. 34, No. 10,
pp. 773-793
Moreno, Justo de Jorge (2008) Efficiency and regulation in Spanish hypermarket retail
trade: A cross-section approach, International Journal of Retail & Distribution
Management, Vol. 36, No. 1, pp.71-88
Moreno, Justo de Jorge (2010) Productivity growth of European retailers: a
benchmarking approach, Journal of Economic Studies, Vol. 37, No. 3, pp.288-313
Pande, Smriti and Patel, G.N. (2011) Assessment of Performance using DEA: A Case
on Chain of Pharmacy Retail Stores located in NCR, in Sardana, G.D. and
Thatchenkery, Tojo (Eds.), Building Competencies for Sustainability in Organizational
Excellence, Macmillan publishers India Ltd., pp. 319-336
Ray, Subhash C. (2004) Data Envelopment Analysis Theory and Techniques for
Economics and Operations Research, Cambridge University Press, New York, USA
Sellers-Rubio, R. and Mas-Ruiz, F. (2006) Economic efficiency in supermarkets:
evidences in Spain, International Journal of Retail & Distribution Management, Vol.
34, No. 2, pp. 155-171
Sellers-Rubio, R. and Mas-Ruiz, F. (2007) An empirical analysis of productivity growth
in retail services: evidence from Spain, International Journal of Service Industry
Management, Vol. 18, No. 1, pp. 52-69



Proceedings of the 10
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International Conference on DEA Brazil2012 47
Appendix A Table 2: Efficiencies obtained
2009 2010 2011
S.No.

BCC Eff. Cost Eff.
Allocative
Eff.
BCC Eff. Cost Eff.
Allocative
Eff.
BCC Eff. Cost Eff.
Allocative
Eff.
1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
2 1.0000 0.8323 0.8323 1.0000 0.7856 0.7856 1.0000 0.7847 0.7847
3 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
4 0.9146 0.7349 0.8036 0.7284 0.6197 0.8508 0.7022 0.6251 0.8902
5 1.0000 0.6619 0.6619 0.9290 0.5567 0.5993 0.8824 0.5562 0.6304
6 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
7 0.9706 0.9027 0.9300 0.9412 0.7713 0.8195 0.9107 0.7522 0.8260
8 0.9587 0.7332 0.7648 0.9963 0.6796 0.6822 1.0000 0.6691 0.6691
9 0.9428 0.6686 0.7092 0.9247 0.6043 0.6536 0.9170 0.5883 0.6415
10 0.9657 0.8743 0.9054 0.9175 0.8566 0.9336 0.9210 0.7378 0.8010
11 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9042 0.9042
12 0.8695 0.6373 0.7329 0.8815 0.6475 0.7346 0.8533 0.5364 0.6286
13 0.8349 0.4594 0.5502 0.7951 0.4026 0.5064 0.7579 0.4041 0.5331
14 0.8854 0.5706 0.6445 0.8498 0.5659 0.6660 0.8667 0.3905 0.4506
15 0.9348 0.4764 0.5097 0.8644 0.4268 0.4938 0.8088 0.3557 0.4399
16 1.0000 0.8645 0.8645 1.0000 0.7863 0.7863 1.0000 0.7603 0.7603
17 0.9012 0.7526 0.8352 0.8909 0.6790 0.7621 0.8962 0.6798 0.7585
18 1.0000 0.5625 0.5625 1.0000 0.5749 0.5749 1.0000 0.4587 0.4587
19 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
20 0.7347 0.3187 0.4337 0.7345 0.3134 0.4267
21 1.0000 0.8099 0.8099 1.0000 0.8340 0.8340
22 1.0000 0.6796 0.6796 1.0000 0.5752 0.5752
23 0.8429 0.5150 0.6110 0.8582 0.5297 0.6172
24 0.8199 0.6512 0.7943 0.7461 0.4975 0.6668
25 0.8046 0.6451 0.8018 0.7906 0.6415 0.8115
26 1.0000 0.9421 0.9420 0.9249 0.7646 0.8267
27 0.7690 0.4849 0.6306 0.7592 0.4847 0.6384
28 1.0000 0.6197 0.6197 0.9740 0.4822 0.4951
29 0.7775 0.7552 0.9713 0.7607 0.7438 0.9777
30 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
31 1.0000 0.5752 0.5752 1.0000 0.5655 0.5655
32 1.0000 0.8634 0.8634 1.0000 0.8817 0.8817
33 1.0000 0.4477 0.4477 1.0000 0.4301 0.4301
34 1.0000 0.6035 0.6035 1.0000 0.6068 0.6068
35 0.8492 0.7987 0.9406 0.8156 0.8115 0.9949
36 0.7357 0.5160 0.7013 0.5891 0.5102 0.8662
37 0.9418 0.2850 0.3026
38 0.8774 0.7284 0.8301
39 0.9169 0.8111 0.8846
40 1.0000 0.5684 0.5684
41 1.0000 0.6334 0.6334
42 0.9908 0.8003 0.8077
43 1.0000 1.0000 1.0000
44 0.9906 0.6208 0.6267
45 0.8861 0.7307 0.8247
46 0.8948 0.8287 0.9262

Proceedings of the 10
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7. Behavioral effects of DEA on
performance assessment
Heinz Ahn
Technische Universitt Braunschweig, Germany, hw.ahn@tu-bs.de
Nadia Vazquez Novoa
Technische Universitt Braunschweig, Germany, n.vazquez-novoa@tu-bs.de
Abstract
This paper examines the Data Envelopment Analysis (DEA) from a cognitive
perspective. Experimental evidence regarding the role of DEA efficiency scores as an
overall non-financial performance measure in a context with multiple alternatives and
attributes is outlined. The study not only confirms that the efficiency score acts as a
strong performance marker when deciding on which decision making units (DMUs)
should be awarded for their non-financial performance, but also shows that the score
may induce a halo effect, significantly influencing a posterior financial assessment.
These results have practical consequences for planning, reporting, and controlling
processes that incorporate DEA efficiency scores.
Keywords: DEA, performance assessment, performance markers, halo effect,
experimental study.
Introduction
DEA is a promising approach to performance evaluation that allows the simultaneous
analysis of financial and non-financial performance indicators. Nevertheless, this
instrument presents some shortcomings. Imminent pitfalls have been extensively
discussed from a prescriptive point of view. Dyson et al. (2001), e.g., systematically
outline conceptual problems of DEA and describe possibilities to cope with them. In
contrast, although the specification of cognitive processes is important to theory
development (Peters, 1993, p. 391), we have found no contributions discussing DEA
applications from the descriptive point of view. This is astonishing, since a DEA-based
evaluation also includes subjective components, implying that it is susceptible to
behavioral influences and limitations. In fact, a (DEA-based) performance assessment
aiming at identifying the best performing DMUs can be seen as a multiple attribute
choice with multiple alternatives, and as such, it can be analyzed from the perspective
of psychological theories.
In this study, the non-financial and the financial performance assessment tasks are
considered as two choice problems. In the first one, DEA scores serve to measure the
overall non-financial performance of a set of DMUs. Based on heuristics and bias
literature, we hypothesize that the relatively high accessibility of DEA scores will make
them act as performance markers, thus (over-)simplifying the choice problem by

Proceedings of the 10
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focusing the analysis on a single cue (Shah and Oppenheimer, 2008; Cardinaels and
van Veen-Dirks, 2010).
Literature on contingent decision making indicates that information used for a choice
task has an effect on posterior choices by influencing the attributes used and their
weights (Dholakia et al., 2005). Additionally, research on decision making has also
shown that (irrelevant) previous information is commonly used when determining a
searched value, thus producing an anchoring bias. A special case of this bias is the
halo effect (Huber, et al., 1987). It refers to the influence that the information about
one (often irrelevant) trait, i.e., a characteristic of a person or an object, has on the
perception of another trait. In this context, the non-financial performance assessment
is expected to act as a halo for the posterior financial performance assessment,
improving (worsening) the financial performance assessment of those DMUs with a
perceived relative high (low) non-financial performance (Tversky and Kahneman,
1974; Huber et al., 1987). We therefore hypothesize that the presence of high DEA
scores will indirectly affect the posterior financial performance assessment through the
non-financial performance assessment.
In the following, we depict the methodological aspects of the experiment conducted
as well as its results. A discussion of the findings concludes the paper.
Method
Bachelor students (N = 72) taking introductory Management Control and Business
Accounting courses at a German university were asked to answer the questionnaire
during a lecture. Students were randomly assigned to one of two conditions (DEA
score, N = 37; no DEA scores, N = 35). Seven cases were eliminated from the analysis
since no valid answers were provided for the dependent variables defined in the
general research model.
The experiment comprised two phases. The first had the aim of evaluating the role of
DEA scores as performance markers on the non-financial performance assessment.
The second phase was designed to investigate possible effects of DEA scores on a
posterior financial performance assessment.
Participants received a table with non-financial data corresponding to 10 different
DMUs and were asked to decide to which three DMUs they would assign a bonus for
non-financial performance (Bnf). The non-financial data included in the report were
based on a real case of a European pharmacy chain and included the following
performance criteria: average number of employees, sales area in m, sales
transactions, and number of customer advices. For those participants in the treatment
with DEA scores (), this measure was also included. The treatment containing DEA
scores permitted to identify three DMUs as efficient ( = 100%), one as almost efficient
( = 98%) and all others as inefficient, with = 54% being the lowest efficiency score.
A brief description regarding the DEA methodology was included in the
corresponding vignette.
In the second phase, participants were provided with a table containing three different
financial indicators for the 10 DMUs: profit, cash flow in thousand euro, and return on
capital. The financial performance indicators were designed to avoid not only a clear

Proceedings of the 10
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domination of one DMU over its peers but also a significant correlation among DEA
scores and the financial measures. Before executing any kind of analytical
examination, participants were required to decide whether to assign a bonus for
financial performance (B
f
) to A. This question had the purpose of concentrating the
attention of respondents on the performance of DMU A. In case an anchoring effect
would occur, augmenting the accessibility of A should reinforce this effect.
The financial performance assessment was measured by means of two main variables.
The first question required participants to decide to which three subsidiaries they
would assign a B
f
. The answer was considered to have nominal scale since
respondents were not asked to elaborate a ranking. The second relevant question
required participants to estimate the financial performance of A in an interval between
0% and 100%. Since this estimation was made only for DMU A, the general research
model was evaluated exclusively for this case (i.e., a DMU with a high non-financial
performance that does not clearly dominate other DMUs and with a relatively good
financial performance).
Previous research has shown that a sequential presentation of alternatives affects the
way they are evaluated. Consequently, the data corresponding to each DMU was
randomized to avoid undesired biases related to the presentation order.
Results
We used a path analysis to prove the general research model for DMU A. The
correlation matrix for the four variables included in the causal model together with the
main statistics for each variable are presented in Table 1.
As expected, the presence of DEA scores is significantly correlated with the
assignment of B
nf
to A, and the assignment of a B
f
to A is significantly correlated with
the perceived score for financial performance for this DMU. It is interesting that the
assignment of a B
nf
to A is also significantly correlated both with the posterior
assignment of a B
f
to this DMU and its perceived financial performance score. This
provides initial support for our hypothesis.
When developing the hypothesis it was predicted that DEA scores would serve as
performance markers and therefore would have an influence on the decision of Bnf
assignment. The path analysis for the case of DMU A (Fig.1) indicates that the
presence of a DEA score of 100% has a positive influence on the Bnf assignment. The
direct effect is positive and significant (a = 0.329, z = 2.822, p = 0.005). The contrary
occurs for the case of DMU D, whose DEA score was only 98% (a = 0.419, z =
3.742, p = 0.000), therefore providing confirmatory evidence for our research
hypothesis.
Following the criterion of considering an indirect effect to be significant if all the paths
involved in its calculation are significant (Kline, 2011), it can be concluded that DEA
scores have an effect on the posterior financial performance assessment. The presence
of DEA scores has an indirect effect on the assignment of Bf to A (ab) as well as on
the perceived financial performance score (abd). Similar results are obtained for
DMU D (ab significant, with b = 0.265, z = 2.292, p = 0.022) Table 2 presents the
coefficients for each of the paths included in the causal model for DMU A.

Proceedings of the 10
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Table 1: Correlation matrix for DMU A and main statistics.
DEA B
nf
to A B
f
to A Score A
DEA 1
B
nf
to A 0.324** 1
B
f
to A 0.109 0.244* 1
Score A 0.169 0.303* 0.401** 1

Mean 0.492 0.430 0.540 70.26
SD 0.504 0.499 0.502 19.38
* Significant at 0.05 level (two-tailed).
** Significant at 0.01 level (two-tailed).



The proposed model for DMU A fits with the data. All but one path coefficients were
significant and several measures of goodness of fit gave support to the model
(CFI = 1.000, (2,65) = 0.411, p = 0.814, and SRMS = 0.034). However, other measures
of fit indicate that the model should still be improved (RMSEA = 0.000 with
confidential interval (0.000 0.150), TLI = 1.270). To augment the model fit, different
modifications could be conducted adding parameters that were not considered in this
experiment. Incorporating other variables to the model could help to improve the
proportion of explained variance for each endogenous variable (RBnf = 0.108, RBf =
0.057, RScore = 0.211).
b = 0.239*
c = 0.206
Assignment of
B
f
to A
Perceived
financial
efficiency score
of A
Assignment of
B
nf
to A
Presence of
DEA scores
a = 0.329**
d = 0.365***
Performance
marker
Halo
effect
Halo
effect

* Significant at 0.05 level (one-tailed).
** Significant at 0.01 level (one-tailed).
*** Significant at 0.001 level (one-tailed).
FI G. 1: PATH COEFFI CI ENTS FOR DMU A (N=65, SOLI D LI NES REPRESENT
S G CA A S 0 21)

Proceedings of the 10
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Conclusions
The present study offers an analysis of the DEA approach focusing on its decisional
consequences. To the best of our knowledge, it constitutes the first attempt to deal
with the DEA approach from a behavioral operations perspective. The results of the
experiment indicate that the presence of DEA scores influences not only the non-
financial performance assessment of the DMUs, but also the posterior financial one.
As expected, DEA scores calculated to measure the overall non-financial performance
of a set of DMUs were found to act as performance markers. Consistent with previous
research on lexicographic heuristics, decision-makers seem to concentrate their
attention on the DEA scores as a manner to reduce the cognitive load and to save
time.
A managerial limitation associated to DEA scores operating as performance markers
arises from a methodological drawback of the basic DEA models: the weights of the
performance criteria are endogenously determined, allowing zero-value weights. This
may induce managers to concentrate their efforts only on some criteria when
attempting to raise the efficiency score of their DMU. A bonus assignment solely based
on the DEA scores may encourage this behavior, leading to a biased resource
allocation. At the same time, it may decrease the motivation of managers running
DMUs that are achieving all relevant performance criteria on a decent level. These
undesirable effects emphasize the importance of the ongoing research on how to cope
with the zero-value weights problem.
As the second main result of our study, it could be shown that the inclusion of DEA
scores to measure the overall non-financial performance may affect the posterior
financial assessment. For the case of DMUs with a general good performance level,
this effect is mediated by the decision of awarding the respective DMU for its non-
financial performance. A DEA score of 100% contributed to increment the proportion
of Bnf awarded to the DMU which in turn affected its financial assessment: more Bf
were assigned to this DMU and its estimated financial performance score was higher.
For cases of good performers with a DEA score lower than 100% such as D
(D = 98%), the presence of the DEA score led to a lower Bnf assignment that
negatively influenced the posterior financial assessment.
The unintended consequences of the presence of DEA scores can be attributed to a
halo effect. A DMU being awarded for its non-financial performance (positive trait)
will be perceived as attaining better financial results. Thereby, the B
nf
assigned to the
DMU serves as a self-generated anchor that acts as a starting point when assessing
the financial performance.
These findings strongly suggest that including DEA scores in the performance report
for facilitating decision-making may result in biased decisions. Since the DEA
approach is gaining relevance for everyday management control, it results essential to
investigate how to deal with this difficulty. To this respect, theories of mental
protection provide some insights (Wilson et al., 2002). On the one side, instruments
that prevent contaminating stimulus to enter managers minds could be developed. On
the other side, providing adequate training regarding cognitive biases could at least
help to diminish the undesirable effects.

Proceedings of the 10
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The halo effect is also relevant from a decision influencing perspective. Incrementing
the recognition for financial performance to DMUs of superior non-financial
achievement level and reducing such recognition to other DMUs may be perceived as
unjust. As a consequence, problems related to organizational commitment, job
satisfaction, performance, trust, etc. may arise.
The results were obtained from a sample of 65 bachelor students of a German
university. Even if the practical choice of resorting to students as surrogates for
managers has been supported by several authors (Moore, 2005), the adequacy of
undergraduate students as substitute for managers has been questioned. One of the
main critics suggests that undergraduate students may differ from experts on a number
of psychological and behavioral dimensions. However, this argument could be
relativized, since it can be assumed that not many managers have a more
comprehensive understanding of the DEA approach. Nevertheless, the current work
should be replicated using different samples in order to achieve a higher validity of
the results.
Further research analyzing DEA from a behavioral perspective is necessary if this
instrument is to be satisfactorily applied in the business context. Besides the cognitive
effects associated to the interpretation of the results, the influence of the DEA
approach on fairness perception should also be considered. A thorough investigation
of the behavioral aspects will enrich the analysis and provide insights into necessary
modeling improvements.
References
Cardinaels E., P.M.G. van Veen-Dirks (2010) Financial versus non-financial
information: the impact of information organization and presentation in a balanced
scorecard, Accounting, Organizations and Society 35 (6): 565578.
Dholakia U.M., M. Gopinath, R.P. Bagozzi (2005) The role of desires in sequential
impulsive choices, Organizational Behavior and Human Decision Processes 98 (2):
179194.
Dyson R.G., R.S. Allen, A.S. Camanho, V.V. Podinovski, C.S. Sarrico, E.A. Shale (2001)
Pitfalls and protocols in DEA, European Journal of Operational Research 132 (2): 245
259.
Huber V.L., M.A. Neale, G.B. Northcraft (1987) Judgment by heuristics: effects of ratee
and rater characteristics and performance standards on performance-related
judgments, Organizational Behavior and Human Decision Processes 40 (2): 149169.
Kline R.B. (2011) Principles and practice of structural equation modeling, 3rd edition,
The Guilford Press: New York.
Moore D.A. (2005) Commentary: conflicts of interest in Accounting. In: D.A. Moore,
D.M. Cain, G. Loewenstein, M.H. Bazerman (Eds.), Conflicts of interest. Challenges and
solutions in Business, Law, Medicine, and Public Policy. Cambridge University Press:
Cambridge et al., 7073.

Proceedings of the 10
th
International Conference on DEA Brazil2012 54
Peters J.M. (1993) Decision making, cognitive science and Accounting: an overview of
the intersection, Accounting, Organizations and Society 18 (5): 383405.
Shah A.K., D.M. Oppenheimer (2008) Heuristics made easy: an effort-reduction
framework, Psychological Bulletin 134 (2): 207222.
Tversky A., D. Kahneman (1974) Judgment under uncertainty: heuristics and biases,
Science, New Series 185 (4157): 11241131.
Wilson T.D., D.B. Centerbar, N. Brekke (2002) Mental contamination and the
debiasing problem. In T. Gilovich, D. Griffin, D. Kahneman (Eds.), Heuristics and
biases. The psychology of intuitive judgment, Cambridge University Press: Cambridge et
al., 185200.

Table 2: Effects of the presence of DEA scores on the performance assessment
of DMU A.

Path
Standardized
coefficient
Coefficient
(original units)
Standard
error
z-stat. Sign.
Direct effects
DEA B
nf
a 0.329** 0.325 0.115 2.822 0.005
B
nf
B
f
b 0.239* 0.241 0.119 2.024 0.043
B
nf
Score c 0.206 8.259 4.679 1.765 0.077
B
f
Score d 0.365*** 14.527 4.272 3.400 0.001

Indirect effects
DEA B
f

a

b
0.079* 0.078
DEA Score
a

c
0.068 2.684

a

d
0.029* 1.138
* Significant at 0.05 level (one-tailed).
** Significant at 0.01 level (one-tailed).
*** Significant at 0.001 level (one-tailed).


Proceedings of the 10
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International Conference on DEA Brazil2012 55
8. Data Envelopment Analysis of
the effieincy frontier for the
results achived by Formula 1
drivers and teams
Prof. Dr. Aparecido Jorge Jubran
UNINOVE, jubran@uninove.br
Profa. Msc. Laura Martinson Provasi Jubran
UNINOVE, laura.jubran@uninove.br
Jos Rubens Moura Martins
UNINOVE, jrubens.martins@uninove.edu.br
Jane Leite Silva
UNINOVE, janelleitesilva@hotmail.com
Abstract
The current Formula 1 driver and team ranking system does not allow for an impartial
and unbiased comparison between results, since the criteria used are oftentimes
inconsistent. In order to make such comparison, the mathematical optimization tool
DEA - Data Envelopment Analysis was used. As a result of this research, an plan was
elaborated to review the efficiency frontier for the results achieved by Formula 1
drivers and teams, and a new driver and team ranking list was created.
Key words: Data Envelopment Analysis, Formula 1, Ranking.
Introduction
The objective of this paper was to design a plan to analyze the efficiency frontier for
the results achieved by Formula One car drivers and teams. This topic is particularly
relevant to the sports community, since the existing comparative performance
measurement methods applied along decades of competitions have always lacked
indicators that apply to all sports categories.
The existing car racer and racing team ranking system does not allow for an impartial
and unbiased comparison, since the criteria used are oftentimes inconsistent.
This paper also aims to help shed a light on the reasons why Formula One car racers
and agents constantly criticize the changes in the ranking criteria set out by FIA -
Fdration Internationale de l'Automobile. By constantly introducing technological
innovations, Formula 1 is today the most audacious and technologically sophisticated
motorsport category in the world.
One of the problems that affect this auto racing category is its points scoring system,
which generates distortions when analyzing and ranking the best drivers.

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The year 2010 marks the beginning of a new scoring scheme up to 10th place in each
Grand Prix, as illustrated in Fig. 1.

Scoring system
Temp./Pos. 1 2 3 4 5 6 7 8 9 10
1950-1955 8 6 4 3 2

1956-1990 9 6 4 3 2 1

1991-2002 10 6 4 3 2 1

2003-2009 10 8 6 5 4 3 2 1

2010 25 18 15 12 10 8 6 4 2 1
Fig.1:Scoring system from 1950- 2010.

These issues bring a negative impact upon sponsors and manufacturers, as well as on
drivers and teams, which are greatly affected. The points scoring system adopted by
FIA has changed frequently along the years, making it impossible to objectively
compare and analyze the results of each race and each championship along the years.
Due to the criteria currently in use, the rankings prepared and released to the public
are inaccurate. The rankings measure performance by driver, nationality, constructor,
engine, and tire manufacturer.
An example of these distortions can be seen in Table 1 (in APPENDICES), showing
the top 10 in the 2010 championship, where the 3 and 4 positions would be reversed
only if the current scoring criteria valid in 2009 continued in 2010.
Methods
The mathematical optimization tool DEA - Data Envelopment Analysis was used to
prepare the reports. Data Envelopment is an analytical tool designed to identify the
best practices for use of resources, which, in our study, comprise those resources
available for Formula 1 teams.
According Emrouznejad (2005), Figure 2 shows a number of units P1, P2 ... P6, where
each unit consumes a resource, but produce different amounts of outputs y1 and y2.
Thus, for a given amount of input feature units that provide larger quantities of
outputs will be considered efficient.


Proceedings of the 10
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International Conference on DEA Brazil2012 57

Fig. 2: Efficiency frontier.
Source: Emrouznejad (2005).

Through this research, an analysis plan was elaborated to review the efficiency
frontier for the results achieved by Formula 1 drivers and teams. It also allowed
putting together a new ranking covering all Formula 1 drivers and teams, as well as
other stakeholders, including engine, tires, and service suppliers.
The mathematical optimization tool DEA - Data Envelopment Analysis was used to
prepare the reports.
A bibliographical research was carried out to collect data on the results of all F1 races
ever beginning with the first race in 1950.
After the results of all F1 races were known, a study was conducted to analyze the
inputs and outputs for a review using the DEA method, with the following
components being assessed:
Decision Maker Units - DMUs: Teams and Drivers.
INPUT: Grid position at qualifying session.
OUTPUT: Position at the end of the race.
Results and discussions
After extensive testing, the following factors were chosen for assessment of F1 results.
Inputs: The driver's position at the start of the qualifying session, i.e., weight 1 for all
drivers, since it was assumed all drivers start the session under the same conditions.

Outputs: The driver's position at the end of the race, considering the arrival order
according to FIAs rules. The output weight for each driver's position was calculated
based on the number of cars participating in each race.

Proceedings of the 10
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Therefore, in a race where 20 cars cross the start line, the car crossing the finish line
first is given weight 20; with weight 19 given to the second place; 18 to the third
place; and so on, up to the last car completing the race. This way, all competing cars
are ranked.
After efficiency was calculated using the DEA tool, each competitor was attributed an
efficiency frontier value. In this case, the driver crossing the finish line first was
attributed an efficiency value 1 or 100%.
The other efficiency values were attributed according to the number of competing
cars, which means the efficiency frontier value increases when the number of
competing cars increases.
The Figure 3 (in APPENDICES), shows the results calculated by the DEA model for the
first Grand Prix (England - 1950), where it is reported the name, the position in the
hallway and Rank obtained. Thus the sum of the Scores of all Grand Prix shows the
champion, according DEA efficiency.
Conclusions
FIAs criteria determine that the ranking be based on points awarded to drivers
according to their position at the end of the race, with up to a number of positions
scoring points, and the remaining drivers scoring no points, regardless of the number
of drivers. Sometimes the scoring criteria, which is set out annually, are changed at the
end of a season. By using this new scoring method, i.e., the DEA efficiency frontier,
these comparisons become a reality, since the assessment is based only on the order
of arrival, which is translated into an efficiency ranking.
References
FARREL, M. J. (1957) The measurement of productive efficiency. Journal of the Royal
Statistic Society, London, v. 120, n. 3, p.253-290.
FIA. http://www.fia.com/en-GB/Pages/HomePage.aspx. Acessado em 30/jan/2011.
Access 30/jan/2011.
EMROUZNEJAD, Ali. (1995-2000) Coventry: Warwick Business School, Data
Envelopment Analysis Home Page. Disponvel em:
<http://www.deazone.com/index.htm>. Access 25 mai 2005.
FORMULA 1. http://www.formula1.com/default.html. Access 30/jan/2011.
JUBRAN, L.M.P. (2005) Aplicao da Anlise por Envoltria de Dados: um estudo da
eficincia das companhias seguradoras. 2005. 143 p. Dissertao (Mestrado)
Departamento de Engenharia Eltrica, Escola Politcnica da Universidade de So
Paulo. So Paulo.
PRADO, D. L. Pontos na F1: Deciso polmica da FIA no a primeira na histria.
Disponvel em < http://www.dzai.com.br/>, 2009. Access 30/jan/2011.
PUCCINI, A. L.; PIZZOLATO, N. D. (1989) Programao linear. 2.ed. Rio de Janeiro:
LTC.

Proceedings of the 10
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International Conference on DEA Brazil2012 59
Appendices

Table 1: Distortions between scoring criteria 2009 and 2010.


Fig. 3: Results calculated by the DEA model

Proceedings of the 10
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International Conference on DEA Brazil2012 60
9. Data Envelopment Analysis
Type Linear and Goal
Programming Models For
Measuring Energy Efficiency
Performance of OECD Countries
Hasan BAL
Gazi University, Science Faculty Department of Statistics 06500 Ankara TURKEY,
hasanbal@gazi.edu.tr (corresponding author)
Mehmet Guray UNSAL
Gazi University, Science Faculty Department of Statistics 06500 Ankara TURKEY,
mgunsal@gazi.edu.tr
Abstract
Models planned in this work are as follows: the goal programming DEA ranking
model recognized as an alternative to multiple criteria DEA and the model which
closes each weighted output (input) component to weighted output (input) sum, and
hence providing a contribution to efficiency account of each output (input)
component proportional to the output(input) values. The proposed models are
applied to measure the energy efficiency performances of OECD countries and the
results obtained are presented.
Keywords: Linear and Goal Programming, Energy Efficiency, Data Envelopment
Analysis
Introduction
DEA was first developed by Charnes et al. [1] that seems to be the most popular
method for measuring the efficiency of homogenous decision meaking units. Bal et al.
[2] suggest goal programming approaches to improve the discrimination power of
DEA. Sexton et al. [3] and Doyle and Green [4] suggest cross efficiency evalution as
an extension of DEA aimed at avoiding some of the mentioned difficulties. Their
technique made use of the cross evaluation scores computed as related to all DMUs
and hence identified the best DMUs [5].
The problem of having multiple optimal solutions to weights for efficient DMUs affect
to a great extent the consistency of operations related to weight cross efficiency
method is most frequently studied topic in DEA literature. Sexton et al. [3] and Doyle
and Green [4] recommended the use of a secondary objective (model) for the cross
efficiency evaluation related to the non-uniqueness of optimal weights in DEA. They
proposed the aggressive and benevolent models for achieving the secondary
objective. Andersen et. al. [5] proved the fixed weighting nature of the cross efficiency

Proceedings of the 10
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evalution in the case of single input and multiple outputs. Orkcu and Bal [6] proposed
goal programming models that could be used in the second stage of the cross
evalution.
DEA, Super Efficiency, Cross Efficiency Evaluation and Multiple
Criteria DEA Models
Data Envelopment Analysis (DEA) is a mathematical programming approach that
utilizes multiple inputs and outputs to measure the relative efficiencies within a group
of decision making units (DMUs). In DEA, it is assumed that there are n DMUs to be
evaluated in terms of m inputs and s outputs. Let
ij
x ( 1, . . . , i m = ) and
rj
y ( 1, . . . , r s = ) represent the input and output values of DMU
j
( 1, . . . , j n = ),
respectively. Subsequently, the efficiency of DMU
p
can be calculated as
1
1
s
r rp
r
p m
i ip
i
u y
v x

=
=
=

(1)
where,
i
v ( 1, . . . , i m = ) and
r
u ( 1, . . . , r s = ) are the input and output weights
assigned to
th
i input and
th
r output,respectively.
1
max
s
p r rp
r
u y
=
=


s.t.
1
1
m
i ip
i
v x
=
=

(2)
1 1
0
s m
r rj i ij
r i
u y v x
= =


, 1, 2, . . . , j n =
0
r
u , 1, . . . , r s =
0
i
v ,
i=1, ..., m

In the above-mentioned models, DMUs is considered to be efficient if and only if
*p=1; otherwise, it is referred to as non-efficient.
DEA can be used only for ranking inefficient DMUs and in order to abolish this
disadvantage various methods were developed [8]. The most commonly used method
developed for ranking efficient decision units is the super efficiency model proposed
by Andersen and Petersen [9].
In addition, the cross efficiency method was developed as a DEA extension tool to be
utilized for identifying the best performing DMUs, and for ranking DMUs using cross
efficiency scores that are linked to all DMUs [3,6]. In the first stage, the optimal
weights of inputs and outputs are calculated for each DMU using the classical DEA
formulation. Given the results of the first stage, the weights used by the DMU can be
utilized for calculating the peer rated efficiency for each of the other DMUs. The peer

Proceedings of the 10
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evaluation score, p,j, indicates the efficiency score for the DMU
j
using the weights
obtained by the DMU
p
[5].
,
1
,
,
1
s
r p rj
r
p j m
i p ij
i
u y
v x

=
=
=

. (3)
If we consider the multiple criteria DEA model, CCR model could be expressed
equivalently in the form given by Li and Reeves [10].
1
min or max
st
s
p p r rp
r
d u y
=
| |
=
|
\ .


1
1 1
1 (4)
0
1, 2, . . . ,
, , 0 , all , and values
p
m
i i
i
s m
r rj i ij j
r i
r i j
v x
u y v x d
j n
u v d r i j
=
= =
=
+ =
=



where
p
d

is the deviation variable for DMU
o
. This DMU is efficient if and only if

0
p
d = or 1
p
= . A multiple criteria data envelopment analysis model formulation with
the minmax and minsum criteria, which minimizes a deviation variable, rather than
maximizing the efficiency score, is shown as below (MCDEA):
1
1
1
1 1
min or max
min
min (5)
st
1
0
1, 2, . . . ,

o
o
s
o o r rj
r
n
j
j
m
i ij
i
s m
r rj i ij j
r i
j
d w u y
M
d
v x
u y v x d
j n
M d
=
=
=
= =
| |
=
|
\ .
=
+ =
=


0 , 1, 2, . . . ,
, , 0 , All , and
r i j
j n
u v d r i j
=


Goal Programming DEA and Component Models
MCDEA which is given in model (6) can also be easily adapted to the weighted goal
programming as follows:

(GPDEA-CCR)

Proceedings of the 10
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1 1 2 3
1 1
1
2 2
1
1 1
min , ,
1
1 (6)
0 , 1, 2, . . . ,

j j
j j
m
i ip
i
s
r rp
r
s m
r rj i ij j
r i
j
a n p p n d
v x n p
u y n p
u y v x d j n
M d
=
=
= =

= + +
`
)
+ =
+ =
+ = =


3 3
0 , 1, 2, . . . ,

j j
n p j n + = =


0, 1,2, . . . ,
0, 1,2, . . . ,
r
i
u r s
v i m
=
=


1 1 2 2
3 3
0, 1, 2, . . . ,
, , , 0
, 0 , 1, 2, . . . ,
j
j j
d j n
n p n p
n p j n
=

=

Where for the DMU under evaluation,
1
n and
1
p are the unwanted deviation variables
for the goal which constraints the weighted sum of outputs less than or equal to unity,
2
n is the wanted deviation for the goal which makes the weighted sum of outputs less
than or equal to unity.
3j
n ( 1, 2, . . . , j n = ) are the unwanted deviation variables for
the goal which realizes M as the maximum deviation, and
3

j
p are the wanted
deviation variables for the same goal. Whereof our aim, given equal weight to the
unwanted deviations, is to minimize the sum of unwanted deviations, is to minimize
thesum of unwanted deviations
1
n , p (
1
1
m
i io
i
v x
=
=

) and
2
p ,
3j
j
n

and
j
j
d

.
The proposed approach is aimed at approximating each weighed output (input)
component to weighted output (input) sum in order to contribute to the efficiency
account of each output componenet in proportion to the output(input) values, i.e., to
the extent of their greatness or smallness. It is also aimed at obtaining weights that are
more appropriate when compared to those obtained by classical DEA. In the second
stage of cross evalution, a model is presented (7) in which the classical DEA
efficiency scores for each unit are preserved and more appropriate optimal weight
values are selected for the units for which the optimal weights obtained by classical
DEA in the first stage possibly have multiple and inappropriate solutions.

Proceedings of the 10
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International Conference on DEA Brazil2012 64

*
1
1
1 1
1
1
min
st

1 (7)
0 j 1, 2, . . . ,
r 1, 2, . . . , s
p
p
p p
s
r rp p
r
m
i i
i
s m
r rj i ij
r i
s
r rj r rp p
r
m
i ij i i p
i
w z
u y
v x
u y v x n
u y u y z
v x v x z

=
=
= =
=
=
=
=
=
=
=

1, 2, . . . , m
, , 0 , all , values
r i p
i
u v z r i
=


Here,
*
p
is the efficiency value for p. DMU obtained from the classical DEA.
Application
In this section, the methods, which are mentioned above, are used to compare the
performance of OECD countries in respect of CO2 emissions, energy consumption
[10]. According to Ramanathans study [10], the input variables are CO2 emissions per
capita (denoted as CO2 per cap hereafter), fossil fuel energy consumption (FOSS), and
the output variables are gross domestic product per capita (GDP per cap) and non-
fossil fuel energy consumption (NFOSS) to measure the energy consumption and
CO
2
emmissionefficiency.
Table 1. DEA-CCR Results of Application Study








Proceedings of the 10
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Table 2. GPDEA-CCR Results of Application Study

Table 3. Component Model Results of Application Study

Table 4. Coefficients of Variation For Weights

According to the obtained results in Table 1-4, it could be seen GPDEA and
Component models have fewer efficient DMUs than classical DEA model. According
to coefficients of variation for weights of inputs and outputs, the proposed models
generally decrease the variation of weights of variables.


Proceedings of the 10
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Table 5. Rankings of DMUs For Methods


Table 6. Spermans Rank Correlations According to Ranking of DMUs


Conclusions
It could be seen that GPDEA and Component models have fewer efficient
DMUs and the proposed models generally decrease the variation coefficient of
weights of variables. The models models also have significant and high
correlation between each other according to ranking scores of DMUs.
References
A. Charnes, W.W. Cooper, E. Rhodes, Measuring the Efficiency of Decision Making
Units, Eur. J. Oper. Res., 2 (1978) 429444.
H. Bal, H.H. rkc, S. elebiolu, Improving the Discrimination Power and Weight
Dispersion in the Data Envelopment Analysis, Comput. Oper. Res., 37 (1) (2010) 99
107.
T.R. Sexton, R.H. Silkman, A.J. Hogan, Data Envelopment Analysis: Critique and
Extension. In: Silkman R.H. (Ed.), Measuring Efficiency: An Assessment of Data
Envelopment Analysis, 32. Jossey-Bass, San Francisco (1986) 73-105.
J.R. Doyle, R. Green, Efficiency and Cross Efficiency in Data Envelopment Analysis:
Derivatives, Meanings and Uses, J. Oper. Res. Soc., 45 (5) (1994) 567578.
T.R. Andersen, K.B. Hollingsworth, L.B. Inman, The Fixed Weighting Nature of a Cross
Evaluation Model, J. Prod. Anal., 18 (1) (2002) 249255.

Proceedings of the 10
th
International Conference on DEA Brazil2012 67
H.H. rkcu, H. Bal, Goal programming approaches for data envelopment analysis
cross efficiency evaluation, Appl. Math. Comput., 218 (2011) 346-356.
R. Ramanathan, An analysis of energy consumption and carbon dioxide emissions in
countries of the Middle East and North Africa, Energy, 30 (2005) 28312842.
D.L., Retzlaff-Roberts, Relating discriminant analysis and data envelopment analysis to
one another, European Journal of Operational Research , (1996) 23: 311-322.
P., Andersen, N., Petersen, A procedure for ranking efficient units in Data
Envelopment Analysis, Management Science, 39(10), (1993) 1261-1264.
X. B., Li, G.R., Reeves, A Multiple Criteria Approach to Data Envelopment Analysis,
European Journal of Operational Research, 115: (1999) 507517.




Proceedings of the 10
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International Conference on DEA Brazil2012 68
10. Decentralization and
productivity of the public
health service in Brazil
Alssio Tony Cavalcanti de Almeida
UFPB Federal University of Paraiba, Brazil, alessio@ccsa.ufpb.br
Carlos Eduardo Gasparini
*

UFPB Federal University of Paraiba, Brazil, ceg2@uol.com.br
Abstract
The scientific literature has pointed to the process of fiscal decentralization as a
potential inducer of efficiency and productivity in the public sector. However, some
authors have questioned whether the process in Brazil would actually generate a
waste of resources and raise problems in the quality of services provided. This paper
uses the Malmquist index and econometrics with panel data to empirically assess the
question of the relationship between fiscal decentralization and performance of the
public health service in Brazil, as well as to provide an overview of the dynamics of
regional productivity in the sector. The results allow us to observe that the
decentralization of health spending has a negative relationship on the productivity of
these services, but fiscal responsibility has a greater influence on the performance of
the local governments.
Keywords: Health, Decentralization of Expenditures, Productivity, Fiscal
Responsibility.
Introduction
Worldwide, health care is of increasing concern, both politically and socio-
economically. In Brazil, the health system experiences increasing pressure to improve
its performance, both in regard to controlling the cost of services and ensuring greater
access and better quality health care is available to the population. To analyze the
current stage of this system it is necessary to understand the process of
decentralization, particularly with the creation of the Sistema nico de Sade (Unified
Health System, SUS), provisions for which are contained within the 1988 Constitution,
where states and municipalities gained the biggest transfers of funds and
responsibilities over the provision of health services.
Oates (1977 and 2005), among others, notes that the fiscal decentralization process
generates a number of benefits to society, given that local governments can provide
goods and services more efficiently, which are more relevant to local preferences and
demands. On the other hand, critics like Prud'homme (1995) point to the number of

*
Recipient of financial aid from IPEA Brazil.

Proceedings of the 10
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risks involved. In an analysis of the Brazilian case, Campos (1998) points out that the
SUS is a system designed to decentralize, "within the government," the management of
the Brazilian public health service, i.e., transferring some powers to states and
municipalities. However, he goes on to highlight the level of unpreparedness of sub-
national governments, in both administrative incapacity, nepotism, lack of technical
resources, inexperience, high level of corruption, etc - to assume the important
responsibilities of the provision of health care.
Against this backdrop, this study aims to examine whether the increased
decentralization of public health services favored or not the productive performance
of the sector in Brazil. In Brazil, several studies attempted to measure the efficiency of
the provision of public goods and services, e.g.: Gasparini and Ramos (2004) and
Faria et al. (2008). However, this study, besides considering the growth of
productivity, advances on two aspects of this issue. First, it focuses explicitly on the
relationship between changes in productivity in the public health service and
decentralization. In addition, it offers a regionalized analysis of the dynamics of
productivity in the sector in Brazil, considering the indicators of technological change
and efficiency for the years 1996 to 2007.
This paper is organized into four parts including this introduction. The next section
presents a description of the underlying data and methodological procedures based
on the nonparametric estimation of the technological frontier and the Malmquist
index, together with the econometric approach. The third section contains the analysis
of results and, finally, the fourth section summarizes the principal conclusions of this
study.
Methods
To achieve the set goals, the empirical analysis of the study was divided into two
stages. The first builds a dynamic index of productivity growth for public health
services, using data from the municipalities aggregated at the state level, where the
indicator can be divided into changes in efficiency and technical innovation. This
index is intended to ascertain the best relations of efficiency and technical changes
obtained during the period between 1996 and 2007. To calculate this indicator, we
used the Malmquist index of productivity, with the help of non-parametric method
Data Envelopment Analysis (DEA) to estimate the necessary efficiency scores. This
approach was chosen as it handles simultaneously multiple inputs and outputs that
are typical of the health sector, and also not to impose functional form on the
production frontier
1
. Thus, for the development of Stage I we used the following
production function of public health services:
(
1
,
2
) = (
1
,
2
,
3
)
(1)

1
The concept of Malmquist productivity index was first introduced by Malmquist (1953) and later
refined by several works, including Caves et al. (1982), Fre et al. (1994) and Thrall (2000). This index
represents the growth of total factor productivity (TFP) of decision making units (DMU), which reflect
two components: efficiency change and technological change over time.

Proceedings of the 10
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International Conference on DEA Brazil2012 70
here:
1
= Number of public hospital beds;
2
= Number of doctors;
3
= Number of
nurses;
1
= Number of hospitalizations;
2
= Number of consultations. These
variables were taken from the DATASUS site (Ministry of Health - Brazil).
The second stage of the study evaluates, by means of an econometric approach with
Panel Data, the relationship between the indicator of productivity growth in health (as
calculated in the previous stage) and variables related to the issue of Brazilian fiscal
federalism and other relevant socioeconomic factors. In this step, we seek to precisely
evaluate the effect of decentralization on the performance of the provision of public
health in Brazil. The model final to be estimated in Stage II is structured as follows:

=
0
+
1


+
2


+
3


+
6


+
7

4
=1
+
10


(2)

Where:

= Productivity growth of public health (calculate in Stage I); =


Decentralization of spending on public health; = Cash flows; =Fiscal
responsibility; = Poverty rate; = Educational attainment. In notation, the
subscript i denotes the different DMUs and t denotes time. The dot above the
variables expresses growth rates. The Reg
j
are dummies for each region of Brazil,
dum
ESC
represents another binary variable that includes the units that have changed
the scale. The information for the second stage was collected from the Secretatia do
Tesouro Nacional (National Treasury Secretariat, STN), the Instituto de Pesquisa
Econmica Aplicada (Institute of Applied Economic Research, IPEA) and the
EDUDATA platform from the Ministry of Education. The data covers the years 1995 to
2007. Nevertheless, in Stage II the evaluation is done by growth rates of all variables
and the year 1996 becomes the starting point of analysis.
Decentralization of the health service becomes more evident from the regulation of
SUS under Laws 8080 and 8142 of 1990 as well as through the largest transfer of
resources from fund to fund to sub-national governments, especially from the
approval of the SUS Basic Operational law of 1996. This has developed a dynamic
analysis from this date. It is noted that the choice of the initial and final analysis was
also dictated by the availability of official statistical databases.
Results and discussions
(a) Productivity of the public health services
To calculate the Malmquist productivity index it was assumed that the technology
employed by Brazilian cities has variable returns of scale, considering both the
technical and socioeconomic heterogeneity of them. In general this indicator was
negative, with an effective growth in only three years. In general, health services
showed a negative growth rate in productivity. On average, the rate of productivity
growth was -1.46% for the entire national territory. The region with the lowest
absolute percentage of decrease was the Southeast with about -1%. On the other
hand, the Midwest, with -3%, was the region that showed reduced productivity of

Proceedings of the 10
th
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factors on public health. It is noteworthy that in 2004 there was a sharp decline in the
growth of the Malmquist productivity index for the South and the Midwest, -16.39%
and -13.43% respectively.
When looking at individual results, it is noted that the Espirito Santo had the highest
total productivity growth in the sample, 1.1% on average, and that the change of
efficiency to this location was mainly responsible for this result. Besides Espirito Santo,
just two other places had a positive indicator, namely: Acre and Bahia, which together
obtained a small 0.1% growth in productivity. The places with the worst average
performance were Roraima, Piau and Distrito Federal, with a decrease of 6.4%, 5.8%
and 5.8% respectively. At the regional level, all the locations had a Malmquist score
lower than one (1) indicating that there was a decline in productivity in the provision
of health services provided by the public sector. The Midwest was the region which
showed the greatest decrease in productivity (-3.1%) much higher than the average for
Brazil (-1.5%).
The major problem showed by this analysis relates to the fact that all the locals,
except Bahia, had a negative result in its technical change (TC), a sign that the
technological frontier has not moved favorably within the range analyzed. On the
other hand the change in efficiency (EC) has had a much better performance than MT,
since only about 26% of the local governments from Brazil had a negative score of
change in efficiency. We observed that average between the years 1996 and 2007, the
TC component dictated the behavior established for the yield index of public health in
the country. Both TC and m reveal a downward trend at the lower end of the range.
On the other hand the EC component showed a more positive performance in the
analysis.
(b) Impacts of fiscal decentralization
Table 1 shows the estimation results of the econometric model, which present the
marginal effects of explanatory factors from the dynamics of productivity on public
health in Brazil. After holding various estimations, with the inclusion or exclusion of
socioeconomic and control variables, a final model that showed greater robustness
was reached. It should be noted that estimation of this model showed a satisfactory fit,
indicating that the variables incorporated explain adequately the phenomenon under
study.

Table 1: Factors associated to the dynamics of productivity of public health
Type Variables Coefficients
Standard
Deviation
t-Statistic (prob.)
Constant -3.0654
*
0.6790 -4.51 (0.00)
Federal Questions
Ds -0.0017
***
0.0009 -1.91 (0.06)
Fr 0.1263
*
0.0117 10.78 (0.00)
Cf 0.1350
*
0.0198 6.80 (0.00)
Socioeconomic Factor Po -0.3249
*
0.0117 -27.87 (0.00)

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Variables of control Ed 0.1854
*
0.0252 7.37 (0.00)
Dummies
Dum_North 2.6715
*
0.4503 5.93 (0.00)
Dum_Northeast 3.0262
*
0.7635 3.96 (0.00)
Dum_Southeast 10.2140
*
1.5619 6.54 (0.00)
Dum_South 9.4414
*
0.9323 10.13 (0.00)
Dum_Scale -7.0935
*
1.0988 -6.46 (0.00)
R adjusted 0.9921
Observations 312
Source: Authors calculations.

The estimation results described in the table above have been achieved considering
the model of regression on panel data of fixed effects. The choice was based on the
Hausman test, which revealed that the fixed effects estimator is consistent and efficient
when compared with the random effects estimator. The estimation was performed
with a total of 26 units in cross-section, over a period of 12 years, totalling 312
observations in the panel.
The dummy referring to the technological aspect of the municipalities (Dum_Scale) as
a factor in controlling the volume produced showed that decentralization caused by
SUS can negatively affect the provision of public health, revealing that the size of the
hospital influences the productivity indicator. The purpose of the incorporation of this
dummy was to control the issue of change in the technological pattern from the
decentralization of health. The model without this binary variable also captured the
productivity of the DMUs that had no change in their returns to scale in the period.
The result expressed in table 1 corroborates the intuition that large hospitals with
decreasing returns to scale tend to have a higher level of productivity than the units of
lower scale. From a regional perspective all the dummies were significant and the
indicator of the productivity of public health care possessed a better relationship with
the localities in South and Southwest, compared to the ones in the Northeast, North
and Midwest. This result is interesting as it highlights that the performance of health
care provisions is influenced by their geographical position, a clear sign of the great
technical and socioeconomic disparities faced by Brazilian regions.
Another interesting feature which helps to better understand regional differences in
productivity concerns the design of Brazilian fiscal federalism. As it is shown in table
1, governments belonging to the North and Northeast have high dependence on
transfers from the Union. Thus, as indicated by positive and significant coefficients of
fiscal responsibility variables (Fr) and cash flows (Cf), where the DMUs that depend
less on transfers tend to have greater accountability and efficiency in the provision of
public goods.
The literature on health economics indicates that environmental factors, particularly
socioeconomic factors, directly influence the productivity and efficiency of goods and

Proceedings of the 10
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International Conference on DEA Brazil2012 73
services provided by the public sector. In this context it is interesting to note the
marginal effect of the growth in the proportion of the poor (Po) on the performance
of health services. The results show that the greater level of education tends to
generate less pressure on public health care through another channel: people with
more education have higher profitability, which creates the possibility of them being
covered by private health plans.
Concerning federal issues, the results showed that the performance of the DMUs in
health provision has an inverse relationship with the decentralization of expenditures.
It confirms the pessimistic expectations about the decentralization process as
experienced by Brazil. The marginal effect found refers to the problems of sub-
national governments in the country (either of a technical nature or a waste of
resources), which probably caused the increased decentralization of expenditures, has
not had the expected effect of increasing the productivity of health services.
It should be remembered, however, that Brazilian municipalities are undergoing a
process of both technical and operational change. The decrease in productivity
resulting from the decentralization of public health may be justified in terms of
changes in returns to scale, as in recent years there has been a strong regionalization
of service delivery. Another important fact captured in the estimates is that localities
that have more fiscal responsibility and increased cash flows produced better results.
Thus, federal units that do not have a typical behaviour of fiscal free-rider tend to
have better performances, given that they tend to worry more (people in positions of
power and taxpayers) about the allocation of resources, which creates greater returns
in efficiency and quality. We also emphasize that the most independent of
intergovernmental transfers, therefore with a more adequate balance between benefits
and burdens, can waste less resources in the provision of public health than those
locations that keep the balance in disequilibrium.
Conclusions
This study has tried to respond to whether increased decentralization of public health
spending favored or not the productivity of this service in the country. Given the facts
presented, it was observed that the performance of the public health services revealed
a negative relationship with the indicator of decentralization of spending in the area.
This result was contrary to the vision in the so called "decentralization theorem,"
which emphasizes gains in social welfare and efficiency when products are provided
by local governments. In this context, the critical view of Campos (1998) on the high
level of wastage, technical and administrative insufficiency, corruption, nepotism and
other problems faced by the management of local governments in Brazil can be a
possible explanation for the results found.
Nevertheless, one must keep in mind that the process of decentralizing the provision
of public health in Brazil has brought strong technological changes, as evidenced by
the change of the returns to scale. Therefore, this technical move may have acted to
impose at first a lower level of productive performance, since the hospitals have
become more spatially decentralized and started to operate with increasing returns to
scale, which might further generate greater resource and productivity savings.

Proceedings of the 10
th
International Conference on DEA Brazil2012 74
References
Campos R (1998). Na Virada do Milnio. Rio de Janeiro: Topbooks.
Caves DW et al. (1982). The economic theory of index numbers and the measurement
of input, output and productivity. Econometrica 50: 1393-1414.
Fre R et al. (1994). Productivity growth, technical progress, and efficiency change in
industrialized countries. The American Economic Review 84: 66-83.
Faria FP et al. (2008). Efficiency of municipal expenditure in health and education: an
investigation using data envelopment analysis in the state of Rio de Janeiro, Brazil.
Revista da Administrao Pblica 42: 155-177.
Gasparini CE, Ramos FS (2004). Relative deficit of health services in Brazilian states
and regions. Brazilian Review of Econometrics 24: 75-107.
Malmquist S (1953) Index Numbers and Indifference Surfaces. Trabajos de Estadstica
4: 209-242.
Oates WE (1977). Federalismo fiscal. Madri: Instituto de Estudios de Administracin
Local.
Oates WE (2005). Toward a Second-Generation Theory of Fiscal Federalism.
International Tax and Public Finance 12(4): 349-373.
Prudhomme R (1995). The Dangers of Decentralization. The World Bank Research
Observer 10(2): 201-220.
Thrall RM (2000). Measures in DEA with an application to the Malmquist Index.
Journal of Productivity Analysis 13: 125-137.


Proceedings of the 10
th
International Conference on DEA Brazil2012 75
11. Deregulation and Performance
of Mexican Banking
Francisco Vargas Serrano
Universidad de Sonora, Mexico, fvargas@guaymas.uson.mx
Arnulfo Castellanos Moreno
Universidad de Sonora, Mexico, acastell@correo.fisica.uson.mx
Gang Cheng
MaxDEA@qq.com, Peking University, China.
Panagiotis Pzervopoulos
University of Loannina, Greece. pzervopoulos@hotmail.com
Luis Rentera Guerrero
Universidad de Sonora, Mexico, lrenter@guaymas.uson.mx
Abstract
The aim of this paper is to study the relationship between Mexican banking sector
deregulation and bank performance, in addition, the effects of competition and bank
risk-taking is accounted for. To this end, we develop a DEA-Malmquist productivity
model of bank performance. A recent econometric advance in General Methods of
Moments, such as the Arellano, Bover/Blundell-Bond estimation, to estimate bank
performance, is applied. The estimated model involves bank panel data from the
Mexican deregulation period, 1988-2000.
Keywords: Deregulation, banking, productivity, Mexico.
Introduction
In the last decades the Mexican banking system has undergone several
transformations. Private banks were nationalized in 1982 and in the period 1991-92 the
banking system was privatized. In 1994 the North America Free Trade Agreement
(NAFTA) became in force. From 1994 onwards, banking investment was open to
foreign capital. Several restrictions were imposed under NAFTA covenants for overseas
participation in the banking sector. While such limitations were supposed to last until
2000, they in fact were lifted during the Mexican financial crises that took place in
1995. After the crisis, foreign investment became predominant in the Mexican
banking sector.
The financial liberalization process encompassed several reforms in order to enhance
efficiency as well as to increase productivity in the financial system. The purpose of
this study is to analyze the effects of banking liberalization on bank performance. The
banking performance is measured by productivity and efficiency. In addition, the
effects of competition and risk-taking are accounted for. With such a purpose, an

Proceedings of the 10
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International Conference on DEA Brazil2012 76
empirical model is applied to bank panel data from 32 banks in Mexico throughout
the period 1982 to 2000.
The next section deals with relevant studies on this subject. The data set is briefly
described in the third section. The fourth section presents the algorithm and the
econometric model. The fifth section deals with some outstanding results. Finally,
some concluding remarks are displayed in the last part.
Previous studies
Selected papers have applied Malmquist techniques to asses bank performance. Some
of those who have done it, include Berg, Forsund and E. Jansen (1992), Berg, et al
(1993), Bukh, Forsund and Berg (1995) and Mlima (1999) for Nordic countries; Grifell-
Tatje and Lovell (1995,1997), for Spanish banks; Leightner and Lovell (1998), for Thai
banks; Rebelo and Mendes, for Portuguese banks (2000); Isik and Hassan, for Turkish
banks; Paradi et al.(2002) for Canadian Banks, Kirikal (2004) and Kirikal, Sorg and
Vensel (2004), for Estonian banks; and Galagedera, U.A. D. and Edirisuriya, P. (2004),
for Indian banks; and Murillo-Melchor. C. et al. (2005) for European banks. By and
large, the available empirical evidence shows a mixture on the effects of financial
liberalization on productivity and efficiency. Gilbert and Wilson (1998) found that
financial liberalization in Korea produced outstanding results on productivity of
Korean Banks. Likewise, Isik and Hassan (2003) dealing with Malmquist DEA model
showed a relevant improvement on Turkish banking productivity after liberalization.
On the other hand, Yildirim (2002) studying the technical and scale efficiencies of
Turkish banks between 1988 and 1999 measured with the use of nonparametric Data
Envelopment Analysis found that over the sample period both pure technical and
scale efficiency measures show a great variation and the sector did not achieve
sustained efficiency gains.
Method
The calculated original DEA Malmquist results were adjusted by bootstrapping
following the Kneip et al (2008) process. Subsequently, in order to avoid distortion
on results, the adjusted Malmquist Index was purified by excluding figures that were
detected as outliers. Once the previous corrections took place, the figures were
incorporated to run the regressions specified below on the liberalization model.
To this end, the liberalization model with four regressions was estimated. The bank
performance (p) dependent variable is regressed on four independent and four
instrumental variables. Bank performance is assessed by four variables, which are
total factor productivity change (TFPCH), efficiency change (EFFCH), technological
change (TECHCH) and net interest margin (nim).
The explicative variables include financial liberalization index (finlib) which is
calculated by Kaminsky, G, and S. Schmukler (2008). The market power (mp) stands
for another explanatory variable, which is calculated following the Panzar and Rose
(1987) model. In addition, a dummy variable accounting for the origin of capital:
foreign or national (for) is included. Finally, the ratio of investment to GDP (invgdp),

Proceedings of the 10
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International Conference on DEA Brazil2012 77
as a macroeconomic explanatory variable, has been added in order to capture the
state of business.
In order to explain bank performance, a general method of moments (GMM) model is
applied to a set of 261 observations on the above mentioned variables. Table 1 shows
the main results of the effects of explanatory variables on total factor productivity
change.
The numerical data available encompasses the period 1982-2000. Input variables
include: deposits, operating cost, and nonperforming loans. Output variables were
represented by: net profit, credit and profitable assets. Such information was gathered
for all 32 banks.
Hypotheses
H
0
1) Financial liberalization positively affected bank performance
2) Credit, capital and liquidity risk enhanced bank performance
3) The foreign capital positively influenced bank performance
4) Investment improved bank performance.
Model
The Malmquist index is used to evaluate productivity change of banks between two
time periods. Such change is called product catch-up and frontier-shift terms. The
catch-up (or recovery) is related to the firm efficiency. The catch-up is a term to assess
the degree at which a firm attains efficiency improvements. On the other hand, the
frontier-shift (or innovation) reflects changes in the efficient frontiers surrounding an
enterprise between two time periods.
Firstly, following Tone, K. (2004) a set of n banking firms (x
j
, y
j
) (j=1, n) is
established, each one has m inputs and q outputs where the vector x
j
R
m
denotes
inputs and a set of q outputs denoted by a vector y
j
R
q
, over the periods 1 and 2.
The notations (x
o
,y
o
)
1
and (x
o
,y
o
)
2
are employed in order to designate decision making
units (DMU
o
)(o = 1, , n) in the periods 1 and 2 respectively.
The production possibility set (X,Y)
t
(t = 1 and 2 ) spanned by {(x
j
,y
j
)
t
} (j=1,,n) is
defined by:
(, )

= (, )|

, 0

, , 0

=1

=1
(1),
where is the row vector with all elements equal to one and R
n
is the intensity
vector, and L and U are the lower and upper bounds of the sums of the intensity
respectively. The production possibility set (X,Y)
t
is characterized by frontiers that are
composed of (x,y) (X,Y)
t
such that is not possible to improve any element of the
input x or any element of the output y without worsening some other input or output.
This frontier is called the frontier technology at the period t. In the Malmquist index
analysis, the efficiencies of DMUs (x
o
,y
o
)
1
and (x
o
,y
o
)
2
are evaluated by the frontier
technologies 1 and 2 in several ways.
The Malmquist index (MI) is computed as the product of Catch-up and Frontier-Shift:
MI = (Catch-up) x (Frontier-Shift) (2)

Proceedings of the 10
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Catch-up=

2
((

)
2
)

1
((

)
1
)
(3) Frontier-Shift=

1
((

)
1
)

2
((

)
1
)

1
((

)
2
)

2
((

)
2
)

1/2
(4)
MI=

1
((

)
2
)

1
((

)
1
)

2
((

)
2
)

2
((

)
1
)

1/2
.. (5)
The obtained output with the DEA Malmquist algorithm was adjusted through
bootstrapping techniques following Kneip et al (2008).
Panzar and Roses market power model
Panzar and Rose (1987) have a reduced form approach using banking information or
bank level to discriminate between perfect competition, monopolistic competition and
monopoly. The Panzar and Rose methodology shows how the changes in input prices
are reflected in the balance of industry or revenues of a specific bank.
The methodology is applied to the banking sector through the following equation:
(

) = +

(
,
)

(6)
INTR
it
is ratio of total interest revenue to total assets of bank i at time t. P
f, it
and X
k, it

denote the input price of factor f and control variable k, respectively, of bank i at
time t.
The Panzar and Rose H-statistic can be calculated as: =

(7)
Where, H is the sum of the elasticities of the (scaled) total revenue of banks with
respect to their factor input prices.
Liberalization model
Following Brissimis et al (2008), the liberalization model is specified as:

=
0
+

1
+
2

+
3

+
4

+ +

(8) where p stands for the


performance of bank i at time t; p is written as a function of a time-dependent
financial liberalization variable, finlib. stands for an index of banking industry
market power; x is a vector of bank-level variables representing credit, liquidity and
capital risk; invgdp is a variable that captures the macroeconomic conditions common
to all banks; and finally the error term u
it
.


Proceedings of the 10
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Results
Table 1: Regression results

TFPCH EFFCH TECHCH NIM
L1. -0.033442 - .27857647*** 0.0496661 -0.162373
L2. -0.031977 -0.081132 -.11918838* .25791811**
Cap -.35856318*** -0.105165 -.33699958* 3.7375533***
L1. 0.9558624 -0.281596 1.0923063* 1.3688977
L2. 0.2210093 -0.686561 0.8996325 -0.958623
Lq -0.607796 -.42143966* 0.0209608 1.7907308***
L1. -0.158325 0.2817561 -0.224369 3.6363456***
L2. 0.1853787 .57322185* 0.0087009 -2.5883752***
Cr -.11590636** .51538691*** -.19412563** .35141742**
L1. 1.0120731 0.3834893 0.4518117 14.836783***
L2. 2.7817392* 1.020891 5.2228821*** -6.9483792***
For -0.011101 -0.166214 0.0444095 0.623175
Finlib -0.136164 -0.037475 0.0282024 0.0450181
invgdp 7.5766796** 7.8517844*** 4.3904461* -8.479457
Mp 0.0484273 0.0214329 0.0652986 0.2667224
Legend: * p<.05; ** p<.01; *** p<.001


The total factor productivity change (TFPCH) is positively affected by factors such as
investment (invgdp), lagged (1) credit risk, and capital risk. On the other hand, TFPCH
is negatively affected by capital risk (cap), and credit risk (cr).
It is clear that investment, capital risk, lagged (1 and 2) of capital risk, lagged (1) of
capital risk and credit risk exert a positive effect for technological advance. On the
opposite side, credit risk, and the lagged (2) of technological change, exert a negative
effect over technological change.
Efficiency change is affected positively by investment, liquidity risk lagged (1 and 2)
capital risk lagged (1), credit risk, credit risk lagged (2). The reverse is true for
explanatory variables such as liquidity risk, credit risk, efficiency change lagged (1).
Net interest margin is positively affected by lagged (1 and 2) liquidity risk, capital
risk, credit risk, credit risk lagged (1), and net interest margin lagged (1). On the
opposite side, credit risk lagged (1), liquidity risk lagged (2), capital risk lagged (1 and
2) and net interest margin lagged (2) show an adverse effect on net interest margin.


Proceedings of the 10
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Conclusions
Risk taking does not seem to be a factor to enhance productivity. As far as credit risk
variables are concerned, the null hypothesis of a positive effect is rejected when bank
performance is measured by total factor productivity change. While credit risk variable
showed up with a negative sign, the lagged versions of the same variable observed
positive coefficients; however, only the two periods lagged was significant.
When bank performance is measures by net interest margin, we have mixed results. If
bank performance is measured by net interest margin, it turns that liquidity risk lagged
(2), capital risk lagged (2), show a negative effect; the null hypothesis is rejected.
However, liquidity risk lagged (1), credit risk, credit risk lagged (1) exert a positive
effect. Thus, the null hypothesis is not rejected.
Likewise if bank performance is measured by efficiency change, credit risk and
liquidity risk lagged (2) showed a positive effect on the dependent variable. Hence,
the null hypothesis is not rejected. On the opposite side, only liquidity risk turned
with negative effect. Therefore, the null hypothesis could not be rejected.
The mixture of result is also present assessing the effects of risk variables on technical
change. The hypothesis about a positive effect of risk variables on technical change
was not rejected for capital risk lagged (1), and credit risk lagged (2). On the other
hand, capital risk, and credit risk, adversely affected banking performance measured
through technical change.
Finally, capital formation seems to be a relevant factor of productivity growth. The
hypothesis that investment positively affects bank performance could not be rejected
for total factor productivity change, efficiency change and technological change.
References
Berg, S. A., F. Fordsund, and E. Jansen. (1992). Malmquist Indexes of Productivity
Growth During the Regulation of Norwegian Banking, 1980-1989, Scandinavian
Journal of Economics, 94 (Supplement), 211-228.
Berg, S. A. F. Fordsund, L. Hjalmarsson, M. Suominem. (1993). Banking Efficiency in
the Nordic Countries- Journal of Banking and Finance 17, 371-88.
Brissimis, S. N., Delis, M. D. and Papanikolaou, N. I. (2008).Exploring the nexus
between banking sector reform and performance: Evidence from newly acceded EU
countries. Journal of Banking & Finance, 32, 26742683.
Bukh P.N.D., F.R. Forsund and S.A. Berg. (1995). Banking Efficiency in the Nordic
Countries: A four-country Malmquist index Analysis, Bank of Norway: Working Paper
Research Department.
Fre, Grosskopf, Norris and Zhang (1994). Productivity Growth, technical progress and
efficiency change in industrial countries, American Economic Review, 84, 66-83.
Galagedera, U. A. D. and Eridisuriya, P. (2004). Application of Data Envelopment
Analysis and Malmquist Productivity Index. Economics Working Paper.

Proceedings of the 10
th
International Conference on DEA Brazil2012 81
Grifell-Tatj, E. and C.A.K. Lovell.(1996). Deregulation and Productivity Decline: The
Case of Spanish Savings Banks. European Economic Review 40(1996) 1281-1303.
Elsevier Science.
Isik, I. and K. Hassan. (2003). Financial Deregulation and Total Factor Productivity
Change: An Empirical Study of Turkish Commercial Banks. Journal of Banking &
Finance 27. Elsevier Science.
Kaminsky, Graciela and S. Schmukler, Short-Run Pain, Long-Run Gain: Financial
Liberalization and Stock Market Cycles Review of Finance, Vol. 12, 2008, 253-292.
Kirikal, L. (2004). Malmquist Indexes of Productivity Change in Estonian Banking.
Tallinn Technical University. In Emrouznejad, A. y Podinovsky, V. (2004) Data
Envelopment Analysis Performance Management. 4
th
International Symposium of DEA.
Aston University UK.
Kneip, Alois & Simar, Lopold & Wilson, Paul W., 2008. "Asymptotics and Consistent
Bootstraps For Dea Estimators In Nonparametric Frontier Models," Econometric
Theory, Cambridge University Press, vol. 24(06), pages 1663-1697, December.
Leightner,J.E. and C.A.K. Lovell. (1998). The Impact of Financial Liberalization on the
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Elsevier Science Inc. New York.
Mlima, A. P. (1999). Productivity Change in Swedish Banks: A Comparison of
Malmquist Productivity Indexes, In dissertation Four Essays on Efficiency and
Productivity in Swedish Banking. Gteborgs Universitet: Economiska Studier.
Murillo-Melchor. C. et al. (2005). Productivity growth in European banking. Universitat
Jaume I. Working Paper. Spain.
Panzar, J. C. y J. N. Rosse (1987); Testing for Monopoly Equilibrium, Journal of
Industrial Economics, 35, pp. 443-456.
Paradi, C. J. et al. (2002) Performance Evaluation in an Oligopoly Environment:
Combining DEA Window Analysis with the Malmquist Index Approach A Study of
the Canadian Banking Industry. Centre for Management of Technology and
Entrepreneurship. University of Toronto. Working Paper. Canada.
Rebelo, J. And V. Mendes (2000) Malmquist Indexes of Productivity Change in
Portuguese Banking: The Deregulation Period, IAER, 6, 3, 531-543.
Tone, K. (2004) Malmquist Productivity Index. In Cooper, W.W., Seiford, L. M., and
Joe Zhu. (editors) Handbook on Data Envelopment Analysis. Kluwer Academic
Publishers. The Netherlands. Pp. 203-228.

Proceedings of the 10
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12. Economies of scale and scope
in mental health care
J.A. Wilschut
*

Delft University of Technology, The Netherlands, j.a.wilschut@tudelft.nl
B.L. van Hulst
Delft University of Technology, The Netherlands, b.l.vanhulst@tudelft.nl
J.L.T Blank
Delft University of Technology, The Netherlands, j.l.t.blank@tudelft.nl
Abstract
Economies of scale and scope are usually derived under the assumption that the set of
production possibilities are shared by all firms in an industry irrespective of whether
they specialize in a single output or not. Mental health care institutions in the
Netherlands vary substantially in the scale and the number of outputs. Estimation of
one cost function therefore seems very restrictive and requires the allowance of zero-
values. We used a translog cost function model with dummy-variables for different
types of institutions, to allow for different technologies. We found evidence for
differences in technologies between institutions specialized in counseling and
integrated institutions that also performed other activities, expressed by the number of
days in the hospital or permanent care, number of treatments in daycare or number of
day activities. The marginal costs of counseling were lower for the integrated
institutions than for the specialized institutions.
Keywords: economies of scale, economies of scope, stochastic frontier analysis,
mental health care
Introduction
Governments seek tools to control the growth of healthcare spending. Producing at
the optimal scale and full use of economies of scope can help reducing the healthcare
spending. However it is important that the economies of scale and scope are correctly
derived. In this study, we will determine economies of scale and scope of mental
health care institutions in the Netherlands. The mental healthcare in the Netherlands is
particularly interesting because of the increasing costs in mental health care due to an
increasing number of patients. Furthermore, the size of the institutions and the
combinations of activities offered varies widely between mental healthcare providers.
If economies of scale and scope exist potential cost savings can be realized by
restructuring the sector.
Economies of scale and scope are generally derived under the assumption that all
firms in a certain industry operate under the same production possibilities, irrespective

*
Corresponding author

Proceedings of the 10
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of whether they specialize in a single output or not (Baumol et al., 1988). In this
paper we test that the assumption of the same technology for all for the mental health
in the Netherlands. Mental health care institutions in the Netherlands vary widely in
scale and in the number and kind of services they offer. Basically there are two types
of firms; integrated firms that offer a wide range of care and ambulant firms that offer
only ambulant care. Given the huge differences between institutions the possibility of
a different cost function for the different types of institutions seems very appropriate.
We therefore apply a cost model to the Dutch mental health care institutions that
allows for such differences, in order to estimate economies of scale and scope as tools
to increase the productivity level. Allowing for differences between the technologies
of the two types of institutions seems a more realistic approach.
Determination of economies of scale and scope starts with the estimation of a cost
function. The assumption that all firms operate under the same production possibilities
implies the estimation of one cost function for all firms. Economies of scope therefore
only depend on differences in cost levels and do not account for differences in cost
functions between specialized and integrated firms. Moreover, estimation of the
frequently used translog function, introduced by (Christensen et al., 1973), requires the
handling of substantial amount of zeros for the specialized institutions in the outputs.
It has been suggested to estimate separate translog cost functions (Weninger, 2003).
Here, we estimate a cost function where we allow for different parameters for the
specialized and integrated institutions.
Methods
Model
Institutions vary widely with respect to scale and type of treatment they offer. A
substantial part of the institutions only perform ambulant care (counseling), and are
likely to vary substantially from integrated institutions that not only offer counseling
but also offer residence to their patients for example. We therefore estimated a cost
function that allows for different technologies between different types of institutions
by including dummy variables. We divided the institutions into two groups, the first
group consisted of institutions that had counseling as the only output, and the second
group was all other institutions. Under the assumption of a translog form (Christensen
et al., 1973), we estimated the following cost function:
( ) | ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) |
| ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) | + + +
+ + + +
+ + +
+ + + + =




= = = =
= = = =
= = = =
= = = =
T aa W Y ae W W ac
Y Y ab W ac Y ab aa D
T a W Y e W W c
Y Y b W c Y b a D C
n
i
n
j
m
i
n
j
j i ij j i ij
m
i
m
j
j i ij
n
i
i i
m
i
i i amb
n
i
n
j
m
i
n
j
j i ij j i ij
m
i
m
j
j i ij
n
i
i i
m
i
i i g
1
1 1 1 1
1 1 1 1
0
1
1 1 1 1
1 1 1 1
0 int
ln ln ln ln
2
1
ln ln
2
1
ln ln
ln ln ln ln
2
1
ln ln
2
1
ln ln ln
(1)

Proceedings of the 10
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International Conference on DEA Brazil2012 84
With:
C = Total costs;
D
amb
= Dummy variable for institutions that performed only counseling
D
intg
= Dummy variable for integrated institutions
Y
i
= output i (i = 1,.., m);
W
i
= Price of input i (i = 1,.., n);
T = year;

, , , , , , , , , , , ,
ij ij ij i i o ij ij ij i i o
ae ac ab ac ab aa e c b c b a parameters to be estimated.

With Shephards lemma we obtain share equations :
| ( ) ( ) |
| ( ) ( ) | ) ,.., 1 ( ln ln
ln ln
1 1
1 1
n j Y ae W ac ac D
Y e W c c D S
n
i
m
i
i ij i ij j amb
n
i
m
i
i ij i ij j ing j
= + +
+ + + =


= =
= =
(2)
With :
S
j
= Cost share equation of input j (j = 1,.., n)

The following restrictions were imposed on the parameters to impose linear
homogeneity in input prices and symmetry:

ji ij ji ij ji ij ji ij
ac ac ab ab c c b b = = = = ; ; ;

); ( 0 ); ' ( 0 ; 1
); ( 0 ); ' ( 0 ; 1
1 1
'
1
1 1
'
1
m ae n ac ac
m e n c c
m
i
mi
n
i
in
n
i
i
m
i
mi
n
i
in
n
i
i
= = =
= = =


= = =
= = =
(3)

We first estimated the cost function under the assumption of the same technology for
different types of institutions by assuming the same parameters for the ambulant
institutions as for the integrated institutions. For the specialized institutions we
multiplied the parameters of the zero-outputs with a dummy variable to make sure
they were not estimated for that observation. The obvious restrictions that we impose
in case of the assumption of same technology:
ij ij ij ij ij ij i i i i o o
e ae c ac b ab c ac b ab a aa = = = = = = , , , , ,


Next, we estimated the model under the assumption of different technologies. We
tested the hypothesis of a same technology using a loglikelihood ratio test.
The models were estimated with maximum likelihood. Moreover, we used a thick
frontier approach with the first estimation over all observations and the second

Proceedings of the 10
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estimation over the 50% most efficient observations (according to the first estimation).
We also tested the required monotonicity and concavity of the model.

The estimated cost functions were used to derive economies of scale and economies
of scope. The economies of scale were represented by the cost flexibility which
described the increase in cost relative to the increase in output (Baumol et al., 1988),
depending on the type of institution. The cost flexibility is described by the following
formula:


( )
| ( ) ( ) |
| ( ) ( ) |


= = = = =
= = = = =
+ +
+ + + =

=
n
i
n
j
j ij
m
i j
j ij
m
i
i amb
n
i
n
j
j ij
m
i j
j ij
m
i
i g
i
i
W ae Y ab ab D
W e Y b b D
Y
C
v
1 1 1 1 1
1 1 1 1 1
int
ln ln
2
1
ln ln
2
1
) ln(
ln
'

Economies of scope were deducted from the marginal cost of the overlapping outputs
between specialized and integrated institutions. We determined the marginal costs at
varying levels of output to account for differences in scale between institutions. The
marginal costs were derived as follows:
( )
| ( ) ( ) |
j
n
i
i ji
m
i
i ij j
j j j
j
Y
C
W e Y b b
Y
C
Y
C
Y
C
mc * ln ln
) ln(
ln
1 1

= =
+ + =

=

Data
The mental health care institutions in the Netherlands report to the Ministry of Health
in the Netherlands. The yearly data collected for this purpose were used in this
analysis over the years 2008-2010. We selected the institutions that dealt with mental
health care only, so departments of psychiatry as part of general hospitals for example
were not included. We selected those institutions that had valid and plausible values
for all variables. In total 201 observations (institutions per year) remained (59 in 2008,
73 in 2009 and 69 in 2010).
We included four measures of treatment as output variables: the number of counsels,
the number of days in residence, the number of part-time treatments and the number
of day activities (Table 1). Of these institutions, 32 were specialized in the sense that
they only performed counseling. The other institutions did counseling and at least one
of the other treatment activities. None of the institutions was specialized in one of the
other activities. We therefore used two groups to which we refer to as specialized and
integrated institutions. We used two inputs, personnel and material and capital. The
latter two were added and used as one variable. Costs of the inputs were available
and we used the number of full time jobs to calculate the price of personnel. The
prices of materiel and capital were based on an index constructed from the Consumer
Price Index and a Price Index for investments of fixed activa of the government
(Statistics Netherlands, www.cbs.nl).

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Results and discussions
We estimated the cost function under the assumption of a common technology for
both specialized and integrated institutions and under the assumption of different
technologies (Table2). The hypothesis of the same technology for both groups was
rejected by the log likelihood ratio test (p< 0.001).
The parameters of the models are very different. Moreover, under the assumption of a
common technology the signs of two of the outputs become negative. The parameter
of output 1 (counseling) had a value that was close to the value of the specialized
institutions under the assumption of different technologies, but then overestimated the
total costs of the integrated institutions. Therefore, the parameters of the other outputs
were given values that decrease the total costs of the integrated institutions. Under the
assumption of different technologies, the costs of the specialized institutions were
slightly more influenced by costs of materiel and capital than by personnel, compared
to the integrated institutions. No significant change was found over time. The model
fulfilled the criteria of monotonicity and concavity.
Since the model with the assumption of the same technology for both types of
institutions does not result in plausible estimates, we report economies of scale and
scope only for the model with different technologies. The integrated institutions
operate under diseconomies of scale on average (cost flexibility 1.05). This particularly
applies to the relatively small integrated institutions (Table 3). The larger institutions
operate under increasing economies of scale. The specialized institutions operate
under economies of scale on average (0.72). However, the cost flexibility rapidly
increases for these institutions and the larger ones operate under diseconomies of
scale. All the specialized institutions are smaller than 0.5 of the average size institution.
The economies of scope follow from the marginal costs of counseling in a specialized
or integrated institution with the same scale (Table 4). The marginal costs of
counseling are higher for the specialized institutions than for the integrated
institutions, except for the very small institutions. Moreover, costs increase with scale
for the specialized institutions, and decrease with scale for the integrated institutions.
The marginal costs of all other products also decrease with scale, reflecting the
economies of scale.
Conclusions
Specialized and integrated mental health care institutions in the Netherlands vary in
the way they operate, as shown by the different technology assumption. We also
found indications that increasing the scale of the institutions and that integrating
counseling in institutions with other types of treatment could increase the productivity
of the sector.
The assumption of the same technology did not give plausible estimates because of
the negative parameter values of two of the outputs. Instead of using dummy
variables, we also tried to replace the zero-values with the minima of the non-zero
values and estimate the model under the assumption of the same technology for all
institutions. The estimates were very similar then to the estimates of the model that

Proceedings of the 10
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allows for different technologies, as derived for the integrated institutions alone. This
approach also led to the rejection of the hypothesis of equal technologies.
The technology can differ between institutions for several reasons. These differences
can be caused by the kind and severity of the disorders that are treated, and for
example by the average age of the patients. We had data on the types of treatments as
expressed by the outputs we used, but did not have any information about the
patients or the disorders that were treated. A Norwegian study showed a substantial
impact of case mix on productivity growth estimates but did not differentiate between
types of institutions (Halsteinli et al., 2010). Given the data, we could only differentiate
between institutions that had counseling as a single output, and all other institutions.
No further differentiation was possible for example of institutions that only performed
one of the other outputs.
We used the marginal costs as a proxy for the economies of scope. Due to the lack of
observations we could not estimate a separate cost function without counseling.
Moreover, the costs cannot be estimated by a translog function in case of a zero
output. Direct estimation of the economies of scope was therefore not possible. We
compared the marginal costs of specialized and integrated institutions of the same
size. The differences in costs could be overestimated because the size of the
integrated institution that relates to counseling is smaller and the marginal costs of
counseling increase with a decreasing scale for these institutions.
We used 201 observations of mental health care institutions over a 3 year period to
compare the costs of the institutions relative to their production. Unfortunately, we
had to exclude another 346 observations because of missing or implausible values. A
substantial part of the excluded institutions had high costs relative to the number of
outputs. Most of the excluded institutions perform other activities which are not
counted in the outputs we used, like for example reintegration activities or parental
support. We did not have usable data to systematically exclude institutions for this
reason. It is therefore likely that some of the institutions with other activities are
included in the analysis. Because of the high costs relative to the output, this would
underestimate the cost efficiency. Due to a lack of data of the costs of mental health
care activities alone, we were not able to include 137 health care institutions with
more than just mental health care, like for example the general hospitals.
Summarizing, this analysis covers a substantial but selective part of the mental health
care sector.
Measuring the output of health care institutions is subject of debate (Hollingsworth &
Street, 2006). In this study we only used the number of treatments and not the number
of patients or the effectiveness of the treatment. We used quality of care
measurements from interviews to evaluate the relation between the efficiency score of
the institutions and quality. We found a negative relation with patient perception of
the effectiveness of the treatment and a non-significant correlation with all other
quality measures (results not shown).
The plausibility of the same technology assumption between firms or institutions has
been largely unexplored. The couple of studies we found came to the same
conclusion that different cost functions are required for specialized and diversified
firms. Differences in cost functions were for example found between general and

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specialty hospitals in Vietnam (Weaver & Deolalikar, 2004), between firms that
provided both freight and passenger railway services in the US and firms that offered
primarily freight services (Weninger, 2003) and between the water and sewerage firms
in England and the water only companies (Bottasso et al., 2011).
In conclusion, specialized and integrated mental health care institutions in the
Netherlands operate under different cost functions. The issue of different technologies
deserves more attention. Drawing the wrong conclusions from the possibly incorrect
same technology assumption can have major policy implications on scale and scope.
References
Baumol, J., Panzar, J.C., & Willig, R.D. (1988). Contestable markets and the theory of
industry structure Sydney: Marcourt Brace Jovanovich.
Bottasso, A., Conti, M., Piacenz, M., & Vannoni, D. (2011). The appropriateness of the
poolability assumption for multiproduct technologies: Evidence from the English water
and sewerage utilities. International Journal of Production Economics, 130(1), 112-117.
Christensen, L.R., Jorgenson, D.W., & Lau, L.J. (1973). Transcendental Logarithmic
Production Frontiers. The Review of Economics and Statistics, 55(1), 28-45.
Halsteinli, V., Kittelsen, S.A., & Magnussen, J. (2010). Productivity growth in outpatient
child and adolescent mental health services: the impact of case-mix adjustment. Soc
Sci Med, 70(3), 439-446.
Hollingsworth, B., & Street, A. (2006). The market for efficiency analysis of health care
organisations. Health Econ, 15(10), 1055-1059.
Weaver, M., & Deolalikar, A. (2004). Economies of scale and scope in Vietnamese
hospitals. Soc Sci Med, 59(1), 199-208.
Weninger, Q. (2003). Estimating multiproduct costs when some outputs are not
produced. Empirical Economics, 28(4), 753-765.










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Table 2 Summary data of included institutions
Average stddev min max
Output (x 1.000)
Counseling (contacts) 137.7 170.8 1.1 888.8
Residence (day) 112.8 125.9 0.0 503.5
Part-time treatment 11.8 16.3 0.0 71.2
Day-activity 22.5 46.3 0.0 258.9

Costs (x 1 million euro)
Personnel 34.1 37.6 0.2 153.9
Kapital 2.1 2.8 0.0 14.9
Material 12.3 12.8 0.1 54.2
Total 48.5 52.7 0.6 215.7

Total # FTE 609.6 646.7 10.8 2602.9
Price personnel (euro) 53556 9376 15514 87747


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Table 3 Parameter estimates
Shared technology Different technologies
Integrated institutions Specialized institutions
Variable Paramete
r
Estimat
e
Erro
r
t-
statistic
Estimat
e
Erro
r
t-
statistic
Estimat
e
Erro
r
t-
statistic
Constant A0 -0.59 0.09 -6.88 0.30 0.05 6.03 -1.47 0.16 -9.11
Counseling
(y1)
B1 1.35 0.04 31.17 0.25 0.06 4.31 1.40 0.06 22.30
Day in
residence
(y2)
B2 0.22 0.10 2.18 0.34 0.05 7.20
Part-time
treatment
(y3)
B3 -0.28 0.09 -3.27 0.30 0.06 5.38
Dayactivity
(y4)
B4 -0.17 0.05 -3.84 0.01 0.02 0.63
Personnel
(w1)
C1 0.71 0.01 65.71 0.70 0.01 61.28 0.55 0.04 15.38
Materiel &
capital (w2)
C2 0.29 0.01 27.39 0.30 0.01 26.10 0.45 0.04 12.46
Time A1 -0.03 0.03 -0.95 -0.02 0.02 -1.20 0.05 0.05 1.02
y1 x y1 B11 0.06 0.05 1.38 0.26 0.05 5.41 0.35 0.03 12.03
y1 x y2 B12 -0.34 0.07 -5.17 -0.15 0.03 -4.88
y1 x y3 B13 0.21 0.04 5.85 -0.17 0.04 -4.46
y1 x y4 B14 0.19 0.03 6.82 0.00 0.01 0.23
y2 x y2 B22 0.16 0.07 2.35 0.05 0.04 1.35
y2 x y3 B23 0.05 0.04 1.10 0.03 0.02 1.45
y2 x y4 B24 -0.03 0.01 -2.00 -0.01 0.01 -1.19
y3 x y3 B33 0.04 0.07 0.48 0.17 0.04 4.07
y3 x y4 B34 -0.15 0.03 -5.89 -0.02 0.01 -1.82
y4 x y4 B44 -0.01 0.01 -0.66 0.00 0.01 0.63
w1 x w1 C11 0.13 0.05 2.55 0.12 0.07 1.63 0.08 0.08 1.01
w2 x w2 C22 0.13 0.05 2.55 0.12 0.07 1.63 0.08 0.08 1.01
w1 x w2 C12 -0.13 0.05 -2.55 -0.12 0.07 -1.63 -0.08 0.08 -1.01
y1 x w1 E11 -0.01 0.01 -1.41 0.01 0.01 0.82 -0.08 0.02 -5.00
y2 x w1 E21 -0.02 0.01 -1.85 -0.01 0.01 -1.46
y3 x w1 E31 0.03 0.01 3.46 0.02 0.01 2.82
y4 x w1 E41 0.00 0.00 -0.73 -0.01 0.00 -1.84

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Shared technology Different technologies
y1 x w2 E12 0.01 0.01 1.41 -0.01 0.01 -0.82 0.08 0.02 5.00
y2 x w2 E22 0.02 0.01 1.85 0.01 0.01 1.46
y3 x w2 E32 -0.03 0.01 -3.46 -0.02 0.01 -2.82
y4 x w2 E42 0.00 0.00 0.73 0.01 0.00 1.84
R2 0.98 0.99
Loglikeliho
od
123 206

Table 4 Economies of scale
Total costs* Specialized Integrated
0.2 1.32 1.14
0.5 1.54 1.04
1.0 0.94
2.0 0.83
*Standardized costs: the costs of an average size institution are equal to 1
Table 5 Marginal costs by type and scale of the institution
Total Costs * Specialized Integrated
Counsel Counsel Days in residence Part-time treatment Dayactivities
0.2 113 142 183 779 81
0.5 172 134 172 854 60
1.0 117 149 873 32
2.0 92 114 827 3
*Standardized costs: the costs of an average size institution are equal to 1

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13. Efficiency analysis and long run
performance: a sequential
model for organizational
assessment
Frederico A. de Carvalho
*

Rua Dona Maria, 303 Javary -26900-000 Miguel Pereira RJ Brazil; UFRJ (the Federal University
at Rio de Janeiro); fdecarv@gmail.com
Marcelino Jos Jorge
Avenida Brasil, 4365 Manguinhos 21040-360 Rio de Janeiro RJ Brazil; IPEC / FIOCRUZ (the
National Institute for Infectology / Oswaldo Cruz Foundation); marcelino.jorge@ipec.fiocruz.br
Marina Filgueiras Jorge
Avenida Padre Natuzzi, 22 So Francisco - 24360-180 Niteri RJ Brazil; INPI (the National
Institute of Industrial Property); marinafj@inpi.gov.br
Abstract
This paper presents a sequential approach to organizational assessment from an
efficiency standpoint. The empirical illustration originates from data referring to the
period 2000-2007 and collected from a sample of 37 libraries affiliated to a federal
university in Rio de Janeiro; this sample covers some 90% of the population. In the
first and second steps efficiency scores computed from estimated DEA (Data
Envelopment Analysis) models are employed to rank DMUs (libraries) as well as to
provide pro-efficiency allocative corrections. The third step presents a long run
evaluation that is accomplished by Markovian analysis through computing the
corresponding equilibrium distribution between (efficiency) states. The Markovian
approach also provides some particular durations such as mean recurrence times
and first passage times that allow managerial interpretation. Since DMUs (libraries)
are here classified as efficient or inefficient according to computed annual scores,
the proposed model is systemic to the extent that only aggregate data are
considered.
Keywords:Organizational assessment. Efficiency analysis. Markovian analysis.
Academic libraries - Brazi.
Introduction
This paper presents an optimization approach to organizational evaluation from an
Efficiency Analysis standpoint. The approach combines in a simple way efficiency
scores computed from the estimation of selected Data Envelopment Analysis (DEA)
models and a long run evaluation provided by Markovian analysis. The proposed

*
Corresponding author

Proceedings of the 10
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model relies essentially on the application of the so-called Efficiency Principle to
assess organizational performance. Following the literature, organization may be
interpreted quite broadly as meaning both public and private entities, and even
nonprofit ones among the latter (VAKKURI, 2003). Hence, even though the empirical
illustration employs data from a sample of Decision Making Units (DMUs) pertaining
to a public organization, there is no loss of generality if and when other kind of
organizations are considered.
Methods
The Efficiency Principle simply states that, when studying the production process in
any organization, whenever a production unit uses the same resources but yields
greater quantities of output than another unit, it should be considered relatively more
efficient (i. e., relative to one another), no matter how formally the productivity
problem is analyzed. Analogously it should be considered relatively more efficient if
it uses fewer resources and yields the same output. From an analytical standpoint
these properties correspond to evaluating an organizational unit in terms of its
position vis vis an adequately defined and computed efficiency frontier. There is
an established body of knowledge - Data Envelopment Analysis (DEA), a class of
mathematical programming models with a now long tradition (Emrouznejad, Parker,
Tavares, 2008) of being applied to a broad range of situations involving the analysis of
production frontiers in a multi-unit, multi-input and multi-output framework in such a
way that usual parametric restrictions are absent.
In a seminal methodological paper Tulkens and Vanden Eeckaut (1995) describe and
explain the main issues relating to the role of time in nonparametric efficiency
analysis, especially in what concerns alternative ways to accommodate empirical
information into reference production sets that will be submitted to efficiency
computations. Of particular interest here (see Table I) is their classification of the
variety of forms whereby the time dimension present in panels may be treated when
investigating observed productive activity.
The paper by Wang and Huang (2007) introduces two models to examine long run
efficiency analysis. However they do not compute any long run solution in any of
those cases. In addition, although they have modelled and specified the probability of
one-step temporal transition from efficient (resp. inefficient) to inefficient (resp.
efficient) state, there seems to be no indication as to how those probabilities might be
used to compute long run structural distributions of the DMUs among the two states
(efficient or inefficient).
Using direct results from finite ergodic Markov chains (Kemeny, Snell, 1972), and
assuming one (estimated) aggregate transition matrix is available, it is possible to
compute the long run distribution of the system (the set of DMUs) between the two
states. This is the purpose of the third step in our model.
The model
Our proposed sequential model consists of three steps. The first two steps involving
the computation of efficiency scores and of operational plans in turn are typically

Proceedings of the 10
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performed through the application of Data Envelopment Analysis to empirical data on
DMU performance. The third step, the novel one, incorporates the structural long
run assessment of efficiency. The case is summarized in Table I according to the
Tulkens-Vanden Eeckhaut (1995) framework. Our example is supported by a
convenience sample of 37 library units, corresponding to more than 80% of total
population. Data were collected from the library systems Management Information
System and relate to three inputs (number of employees, physical area and number of
volumes) and four outputs (number of visits, of loans, of registers and of
consultations). The solution of the appropriate linear programming problem provides
numerical scores for each DMU that characterize them with respect to efficiency
status. For each inefficient DMU an operation plan is also provided that indicates
(re)allocative targets for the DMU to reach efficiency. Finally scores will also be
needed to compute the transitions between the two states along the time period for
the whole set of DMUs.

TABLE I. SUMMARY ON CASE STUDY
Case (DMUs)
Number of
DMUs
Number of
variables
Time Period
University libraries 37 7 2000 -2007
DEA condition
satisfied *
DEA model
Yes BCC-O
TVE classification**
Contemporaneous

Notes: *: number of DMUs not less than two (three) times the number of
variables.
**: classification of (sample) observed subsets by Tulkens-Vanden Eeckaut (1995)

As soon as a transition matrix is available, long run analysis is possible and will result
from the simple computation of a fixed point for the transition matrix (KEMENY,
SNELL, 1972). This fixed point is a vector containing the long run distribution of the
system. Since we do not follow the statistical approach applied by Wang and Huang
(2007), some form of combination must be chosen for the initial transition matrix. In
our model we use the following basic result (Kemeny, Snell, 1972): when the number
of time steps grows indefinitely one has
lim (1/n)(P + P2 + . . . + Pn) = [1 1 1 1] (2)
where n is the number of steps; Pn = (( pij (n) )) is the nth power matrix, whose
(i ; j) element represents the probability of transition from state i to state j after n
steps; [1 1 ;1] is a column-vector with all elements equal to 1; the apostrophe
means transpose and is a constant row-vector containing the long run equilibrium
distribution between states whose components are nonnegative and sum to 1 (a so-
called probability vector). The finite mean in the left hand side of (2) suggests a way
to estimate a single matrix from the seven available and then to compute the long run
corresponding to this averaging matrix.

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Results and discussions
In this section findings are presented according to the order of proposed steps
computed efficiency scores, operation plans and long run distribution.
First step: efficiency scores are computed and DMUs may be ranked accordingly
A sample profile for the 37 DMUs is given in Table II for the last year of the period of
study. The basic results for any DEA analysis namely, computed efficiency scores
appear in Table III.
Second step: operation plans indicate optimal changes for each library along time
Operation plans are always produced as a typical result from a DEA solution and in
this example they appear in a consolidated form in Table IV. In every individual
matrix (not exhibited here) showing the allocative change for each (inefficient) library
and each year, there are indications of resource decrease and output increase; this
information is summarized in that table and deserves managerial attention.
Third step: first passages, mean recurrence and long run change
In order to compute, for the whole system of libraries, the transition matrix between
the two states - efficient and inefficient - all transitions are now considered in
addition to those implied in Table III, where the trivial case of DMUs that were
efficient along the whole period is only quoted in a footnote.
Table 2. Sample profile for university libraries in 2007
Number
Employees
1 33 8,41 8,06 95,83%
Total area
( m2 )
37 6000 865,16 1400,03 161,82%
Volumes 872 277134 35228,9 53343,4 151,42%
Visits 108 137385 20974,7 33971 161,96%
Registrations 0 5603 1043,38 1115,4 106,90%
Loans 0 30191 5116,03 6578,68 128,59%
Consultations 0 66638 8091,62 12228,7 151,13%
Service mix
(number)
5 13 9,54 1,87 20%
Variables
Coefficient
of Variation
Min Max Mean
Standard
deviation

Given that we are working with contemporaneous reference sets (see Tulkens and
Vanden Eeckhaut, 1995, and Table I), data for 2000-2007 allow to obtain 7 transition
matrices, say P1, P2, , P6, P7 . In order to apply the finite sum approach, we
employ successive products of yearly transition matrices, instead of powers of the
same (initial or otherwise chosen) transition matrix. Therefore we can take the seven
factor average matrix A defined as
A = [P1 + P1P2 + P1P2P3 + ... + P1P2P3P6P7) / 7 (3)
as a good candidate to be used when solving the fixed point problem, since it
incorporates more information than each individual matrix, in addition to being a
good picture of the successive one-step, two-step until seven-step transitions, in the

Proceedings of the 10
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spirit of equation (2). Solving the fixed point equation A = we obtain the
(estimated) long run distribution of the system between states as follows
E ( percent efficient ) = 49,52%; NE ( percent inefficient ) = 50,48%.
Note that these figures slightly differ from the mean (48,65%, equal to the median) of
percents in the last line of Table III. In this sense it can be argued that long run
analysis seems to be of a different nature vis vis the arithmetic of numerical
individual scores. Remember that products of transition matrices bring into play all the
transitory visits to the two states along time.
The fixed point for the equation A = also provides directly the mean
recurrence time (Kemeny et al. 1959, p. 413) for the states of the system, that is, the
mean time required before the system returns to a given state having started in that
same state. The mean recurrence time is approximately equal to 2 years in both cases,
so that the period of two years seems to be critical in the sense of monitoring the
return of a state to itself. In the case of inefficiency it represents a sort of safe mean
time span for managers to try to change the operating conditions facing inefficient
units, Since the operation plans already point to optimal changes by unit, managers
may evaluate for which units those changes would be feasible within (the next) two
years. Note that on average an inefficient will return to inefficiency four months
before it may reach efficiency for the first time, if no managerial action is taken.


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Table III. Efficiency Scores* And Yearly Averages: 2000 2007
SCORES SCORES SCORES SCORES SCORES SCORES SCORES
2001 2002 2003 2004 2005 2006 2007
1
1 0,841 1 1 0,605 0,811 0,68 1
2
0,571 1 1 1 0,965 0,943 1 1
3
0,305 0,936 0,845 0,661 0,542 0,846 0,775 0,574
4
0,989 0,96 0,769 0,783 0,829 1 1 1
5
1 1 1 1 1 0,947 1 1
6
1 0,696 0,742 0,494 0,584 0,757 0,548 0,65
7
1 0,731 0,87 0,452 0,353 0,127 0,466 0,624
8
0,941 1 0,471 0,559 0,782 0,65 0,626 1
10
0,62 0,895 0,712 0,974 0,619 0,74 1 0,679
11
0,528 0,66 1 0,779 0,727 1 0,847 0,646
12
0,404 0,59 0,287 1 1 1 1 1
17
1 1 0,627 1 1 1 0,336 0,37
18
0,604 0,815 0,696 1 1 1 0,807 1
19
1 1 1 1 1 0,959 1 0,921
20
0,6 1 0,867 0,779 0,743 0,498 0,543 0,56
21
0,401 0,302 0,396 0,109 0,138 0,371 0,145 0,115
22
1 1 0,507 0,654 0,337 1 0,842 0,121
24
0,391 0,501 0,492 0,387 0,395 0,931 0,319 0,32
25
0,733 0,69 0,84 0,329 0,307 0,482 0,64 0,506
26
0,838 1 0,467 0,683 0,236 0,562 0,384 0,863
27
0,334 0,412 0,41 0,407 0,358 0,223 0,496 0,241
28
0,892 0,574 1 1 1 1 1 0,945
30
1 0,442 1 0,555 0,972 1 1 0,82
31
0,071 0,064 0,055 0,143 0,185 0,02 0,01 0,017
32
0,45 0,781 0,928 0,873 0,87 1 1 1
34
0,562 1 1 1 1 1 1 1
35
1 0,793 1 0,665 0,757 0,354 1 1
36
0,107 0,202 0,196 0,172 0,113 0,353 0,401 0,381
37
0,359 1 1 1 0,892 1 1 1
Mean
(n=37) 0,7486 0,8077 0,7886 0,7691 0,7381 0,7993 0,7801 0,7663
Percent
efficient 45,96% 48,65% 48,65% 48,65% 40,54% 51,35% 54,05% 51,35%
DMU
SCORES
2000

Note. * - All DMUs with scores equal to 1 for the whole period have been excluded
Conclusions
Upon assuming the Efficiency Principle as a guideline to organizational evaluation,
this paper presented a model for organizational assessment in the short and long runs
by combining two approaches the DEA approach to efficiency analysis and the
Markovian assumption that introduces a long run perspective. Results have shown that
the three step model uncovers quantitative aspects that may be of assistance to
managers committed to efficiency in the short and long runs. For long run assessment
we rely on Markov Chains to compute an aggregate measure of the distribution of the
productive system (the organization) between two states efficient or inefficient.

Proceedings of the 10
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Since DMUs (libraries) are here classified as efficient or inefficient according to
computed annual scores, the proposed model is systemic to the extent that only
aggregated data are considered. The other useful application of the Markovian
approach provided better knowledge concerning the time delay required for efficiency
to be attained for the first time when a prescribed operation plan happens to be
adopted, as well as about the time during which an undesired (inefficient) situation
will persist if that adoption is postponed.

Table IV. Average Operation Plans: 2000 - 2007
Inputs 2000 2001 2002 2003
Inputs 2004 2005 2006 2007
-1,44 -1,15 -0,76 -1,29
-0,93 -1,18 -0,61 -0,81
-60,75 - 71,04 * -29,85 -70,35
-48,94 -143,47 -88,05 -136,27
-3064,48 -3373,49 -1880,71 -4601
-6447,08 -651,77 -4720,75 -3153,65
Area (m2)
Volumes
(number)
Employees
(number)
Area (m2)
Volumes
(number)
Employees
(number)

Note * - this figure relates to a single library.
References
Emrouznejad A., B. Parker; G. Tavares (2008) Evaluation of research in efficiency and
productivity: a survey and analysis of the first 30 years of scholarly literature in DEA,
Socio-Economic Planning Sciences 42 (3): 151-157.
Kemeny J. G., J. L. Snell (1972) Mathematical Models in the Social Sciences.
Cambridge, Mass.: The MIT Press.
Tulkens H., P. Vanden Eeckaut (1995) Non-parametric efficiency, progress and regress
measures for panel data: methodological aspects, European Journal of Operational
Research 80 (3): 474-499.
Vakkuri J. (2003) Research Techniques and Their Use in Managing Non-profit
Organizations an illustration of DEA analysis in NPO environments, Financial
Accountability and Management 19 (3): 243-263.
Wang M. H., T. H. Huang (2007) A study on the persistence of Farrells efficiency
measure under a dynamic framework, European Journal of Operational Research 180
(3): 1302-1316.


Proceedings of the 10
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14. Efficiency in the industrial
sectors of Brazil in terms of
contributing to sustainable
development
Flvia de Castro Camioto
Department of Production Engineering, University of So Paulo (Brazil),
flaviacamioto@yahoo.com.br
*

Enzo Barberio Mariano
Department of Production Engineering, University of So Paulo (Brazil), enzo.mariano@gmail.com
Daisy Aparecida do Nascimento Rebelatto
Department of Production Engineering, University of So Paulo (Brazil), daisy@sc.usp.br
Abstract
The purpose of this article is to analyze the efficiency of the industrial sectors in Brazil
from 1996 to 2009, considering their contributions to the sustainable development of
Brazil. To this end, we used the Data Envelopment Analysis (DEA), which enabled,
from the additive model and the window analysis, to evaluate the ability of industries
to reduce environmental impacts and increase social and economic benefits. The
results of this study indicated that the Textile sector is the most efficient industrial
sector in Brazil in terms of contributing to sustainable development, followed by these
sectors: Foods and Beverages, Chemical, Mining, Nonmetallic, Paper and Pulp and
Metallurgical.
Keywords: Industrial Sectors, Data Envelopment Analysis, Sustainable Development.
Introduction
The data presented in the last Intergovernmental Panel on Climate Change (IPCC,
2007) indicate that global warming is largely due to human activity, especially human-
caused CO
2
emissions. Along these lines, fossil fuel burning has been shown to be
responsible for approximately 85% of all anthropogenic CO
2
emission produced
yearly.
Silva and Guerra (2009) explain that the use of fossil fuels has driven the world
economy since the Industrial Revolution, with energy as an essential component for
the social and the economic development of a nation and its supply is an essential
pre-requisite to human activities.

*
Address correspondence to Flvia de Castro Camioto, Department of Production Engineering,
University of So Paulo, Trabalhador So-Carlense, 400, So Carlos, SP, 13566-590 Brazil. Phone: +51 16
3373 9428, Fax: +55 16 3373 9425. E-mail: flaviacamioto@yahoo.com.br

Proceedings of the 10
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Thus, the environmental implications of the production and the use of energy
resources have been presented as a major challenge for developed and developing
countries, since the production, distribution, processing and consumption of energy
should be directed to ensure development, without increasing the negative effects to
society and the environment.
Despite the study by La Rovere and Simes (2008), which analyzed the availability of
renewable energy sources in Brazil, to conclude that Brazils energy matrix is relatively
clean, Brazils internal use of renewable energy is of 43.7% (BEN, 2010), the industrial
sector still has many of its activities dependent on fossil fuels. As a result, the industry
ends up impacting the environment by emitting extremely high concentrations of
greenhouse gases (GHG), increasing global warming, in addition to adding to the
extensive mining in the form of fuel oil and coal.
Considering that the industrial sector can significantly contribute to the challenge
against climate change, several studies on environmental and economic aspects in the
industry have been developed (Oggiono et al., 2011, Schneider et al. 2011; Tomasula
and Nutter, 2011; Wernet et al. 2011; Hamzah et al. 2010, etc.). It should be
mentioned, however, that most of these studies tend to focus on particular industrial
sectors, processes or products.
Despite the few works, such as that by Mao et al. (2011), which using statistical data
analyzed Chinas energy consumption and GHG emissions by industrial subsystem
and sector, and that by Luken and Castellanos-Silveria (2011), which compared the
changes in economic, environmental and social variables that occurred in the
manufacturing industry, in groups of developing countries, between 1990 and 2004,
there are still ample opportunities for studies covering various industrial sectors and
their contribution to promoting economic development with environmental respect
and social improvement.
Given this context, this articles main objective is to analyze the efficiency of the main
industrial sectors in Brazil, during 1996 to 2009, in view of their energy consumption
and their contributions to the sustainable development of the country. Therefore, this
work was developed to address the three basic pillars of sustainability, which are
economic, social and environmental development.
Methods
To reach the goal, a mathematical programming method called Data Envelopment
Analysis (DEA) was used. This method, based on the additive model and on the
window analysis, enabled analyzing the performance of the industrial sectors of Brazil
to reduce energy consumption and CO
2
emissions from fossil fuels (inputs), while
increasing the GDP by sectors, the persons employed and personnel expenses
(outputs).
For this research, the main Brazilian industrial sectors were selected, for which the
National Energy Balance (BEN) and the Brazilian Institute of Geography and Statistics
(IBGE) provided data, and due to lack of available information from IBGE some
sectors were grouped. Thus, for this work, the spatial delimitation of the Brazilian
industry includes: (a) Nonmetallic, which corresponds to the cement and ceramics

Proceedings of the 10
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sectors, (b) Mining, which corresponds to the mining and pelletizing, excluding oil,
natural gas and coal exploration, (c) Metallurgical, which corresponds to the sectors of
pig-iron and steel, iron alloys and non-ferrous (d) Chemical, (e) Foods and Beverages,
(f) Textiles, and (g) Paper and Pulp.
In addition to the energy consumption, the variables used in this analysis were: (1)
sectoral GDP, as a variable of economic growth; (b) personnel expenses in the form
of salaries, withdrawals and other remunerations, as a variable related to social
development; (c) persons employed in each sector, as a variable related to social
development; and (d) CO
2
emissions from fossil fuels, as a variable related to the
environmental development.
The data related to the variables "personnel expenses" and "persons employed" were
collected on the website of the Brazilian Institute of Geography and Statistics (IBGE).
The variables "GDP sectoral" and "energy consumption" were collected in the report
of the National Energy Balance (BEN), available on the website of the Ministry of
Mines and Energy (MME). The variable "CO
2
emissions from fossil fuels" was
calculated using the top-down method, internationally recognized and recommended
by the UN (United Nations) (IPCC, 1996). In order to calculate the carbon emissions of
the Brazilian energy system, the MCT (2006) adapted the top-down method,
recommended by IPCC (1996), for the particular characteristics of the Brazilian energy
system. Thus, in this work, for the calculation of CO
2
emissions, many of the data
used were drawn from this document.
The time interval to be analyzed in this study includes a period of fourteen years
(1996-2009), and the criterion used to define it was the data availability with the same
calculation base.
Results and discussions
First, in order to verify if the "CO
2
emissions from fossil fuels" and "energy
consumption" contributed to the formation of the output variables, we performed a
statistical analysis. Thus, we constructed a correlation matrix in order to verify the
linear correlations among all variables with their statistical significance. The software
used to perform such analysis was Stata MP 11.
Table 1 Correlation Matrix
Energy
consumption
CO
2

emissions
GDP by
sector
Persons
employed
Personnel
expenses
Energy
consumption
1,0000
p-value
CO
2
emissions 0.7235 1,0000
p-value 0,0000
GDP by sector 0.8833 0.4977 1,0000
p-value 0,0000 0,0000
Persons employed 0.4352 -0.2278 0.6602 1,0000
p-value 0,0000 0.0241 0,0000
Personnel
expenses
0.5230 -0.0099 0.7532 0.8399 1,0000
p-value 0,0000 0.9231 0,0000 0,0000


Proceedings of the 10
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Table 1 presents the results of the correlation matrix which showed that the all
variables of inputs were significant with p-value below 10%, for at least one output
and vice versa.
From the application of the variant additive model of DEA, window analysis was
performed to verify the efficiency of industrial sectors from 1996 to 2009, considering
both the reduction of inputs "energy consumption" and "CO
2
emissions from fossil
fuels", as the increase of outputs "GDP by sector ","persons employed" and "personnel
expenses". The results of this study indicated that the Textile sector was the one with
the highest average efficiency with respect to the variables considered, followed by
the sectors: Foods and Beverages, Chemical, Mining, Paper and Pulp, Nonmetallic,
and Metallurgical. It is important to remember that in the DEA-additive, the higher the
value of the objective function, the greater the inefficiency of the DMU. As for the
standard deviation of efficiency, the highest value was that of the Metallurgical sector,
followed by the sectors: Chemicals, Foods and Beverages, Mining, Nonmetallic, Paper
and Pulp, and Textile.
Thus, the Metallurgical sector, considering the variables analyzed in this work, are the
least efficient, being far below the others and with greater variability. From Table2, we
can see that this sector was becoming more inefficient as the oldest years were being
excluded and the most recent ones being contemplated in the windows, and the
average of the sum of the slacks increased from 1.99 in the first window (1996 -2002)
to 2.61 in the last one (2002 - 2009).
Table 2 - Window Analysis Sectors
Efficiency Means
Windows (means)
Total Means Standard deviation
1 2 3 4 5 6 7
Metallurgical 1.99 2.23 2.30 2.20 2.44 2.63 2,61 2.34 0.10
Paper and Pulp 0.60 0.70 0.74 0.76 0.78 0.88 0.90 0.76 0.01
Nonmetallic 0.66 0.73 0.75 0.75 0.75 0.82 0.80 0.75 0.01
Mining 0.41 0.45 0.46 0.41 0.36 0.33 0.32 0.39 0.03
Chemical 0.14 0.29 0.27 0.27 0.27 0.31 0.32 0.26 0.04
Foods and Beverages 0.06 0.19 0.22 0.18 0.13 0.22 0.17 0.17 0.03
Textile 0.01 0.02 0.01 0.01 0.01 0.02 0.02 0,02 0,0004

Then, as second to last in the efficiency ranking of Brazils industrial sectors, there is
the Paper and Pulp sector, which like the Metallurgical sector, its efficiency decreased
as the oldest years were excluded from the analysis and the most recent ones were
contemplated in the windows, as shown in Table 2. It is noteworthy, however, that
the variability of this sector was significantly lower than the metallurgical sector, with
the standard deviation equal to 0.01.
The third in the inefficiency ranking is the Nonmetallic sector. This sector also was
becoming more inefficient as the oldest years were being excluded and the most

Proceedings of the 10
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recent ones being contemplated in the windows. As the fourth sector, both in
efficiency and inefficiency, the Mineral Extraction sector, presented only in the last
four windows analyzed, increased efficiency as the oldest years were excluded and
the youngest years were included in the analysis. Thus, it can be said that the Mining
industry sector has shown improvement in recent years, in relation to their
contribution to sustainable development. The results showed that this sectors leap in
quality began in 2006.
Although the Chemical sector showed a good level of efficiency, being the third in the
ranking, it also showed a great variability over the years. An important feature to be
considered when analyzing the results of this sector is the fact that despite it has, in
general, worsened from window to window, the last year of each window was always
efficient, which demonstrates the sector has shown significant and rapid improvement,
with the most recent year of the window being always more efficient than the
previous ones. It should be mentioned that the only exception to this fact was the
years of 2008 and 2009, when the sector had a significant worsening. It is also
noteworthy that the years this sector stood out most, efficient in all the windows, were
the years 2004 and 2007.
Similar to the Chemical sector, the Foods and Beverages sector also showed high
variability in relation to efficiencies, and also worsened from window to window. This
sector, as well as the Chemical sector, showed significant and rapid improvement in
recent years, which can be corroborated by the fact that the last year of each window,
without exception, was efficient in relation to the others. It is important to mention
that the years the Foods and Beverages sector most stood out, being efficient in
multiple windows, were the years 2004 and 2006.
Finally, the sector that was most efficient by reducing inputs and increasing outputs, in
this work was the Textile sector. This sector showed high average efficiency in all
windows, besides having the lowest standard deviation relative to the other sectors. It
is noteworthy that the years this sector most stood out, effective in multiple windows,
were the years 2001, 2003 and 2004.
Conclusions
Adopting the concept of sustainability requires not only the viability of the economic
approach, but also the social and environmental variables in order to achieve a better
spread of the gains acquired by the use of the natural resources with minimum
damages to the planet and to humanity. A fair development process demands the
interaction of sustainability dimensions to harmonize different interests involving
economical growth and a social and ecological perspective.
Therefore, this article analyzed through the concept of efficiency, the contribution of
seven Brazilian industrial sectors for the sustainable development, which addressed
the three basic pillars of the triple bottom line, which are economic, social and
environmental development. Thus, we analyzed the efficiency of the Brazilian
industrial sectors from 1996 to 2009, to reduce the inputs "energy consumption" and
"CO
2
emissions from fossil fuels" and increase the outputs "sector GDP", "persons
employed" and "personnel expenses", simultaneously. The outcome of this study
showed that the Textile sector is the most efficient in terms of contribution to the

Proceedings of the 10
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sustainable development in Brazil, followed by the sectors of: Foods and Beverages,
Chemical, Mining, Nonmetallic, Paper and Pulp, and Metallurgical.
These results, besides the caution needed in interpreting the trends due to limited
data, must be seen as a first attempt to illustrate the contribution of the Brazilian
industrial sectors to sustainable development. In this sense, besides the variables
analyzed in this study that addressed the three pillars of sustainability, for future
works, it is possible to consider that adopting the sustainability concept includes one
of the main goals of achieving a greater fairness in income distribution, which would
imply the inclusion of new variables in the study.
According to the results of this work, it is important notice that all industrial sectors,
especially the Metallurgical, the Nonmetallic, and the Paper and Pulp, can still
contribute significantly to the complex challenge of promoting economic development
with social improvement and environmental respect. For this, the current and future
developments must be closely associated to the sustainable, efficient and secure use of
energy based on environmentally and economically viable approaches for the future
of society in the short and long term.
References
BEN - Balano Energtico Nacional, 2010. Divulga informaes relativas ao binmio
oferta consumo de fontes de energia. Available at: <https://ben.epe.gov.br>.
(Accessed 04.11.10).
Hamzah, M.O., Jamshidi, A., Shahadan, Z., 2010. Evaluation of the potential of
Sasobit to reduce required heat energy and CO2 emission in the asphalt industry.
Journal of Cleaner Production 18: 1859-1865.
IBGE Instituto Brasileiro de Geografia e Estatstica., 2011. Pesquisa Industrial Anual
Empresa. Available at: <http://www.sidra.ibge.gov.br>. (Accessed 04.05.11).
IPCC Intergovernmental Panel on Climate Change., 1996. Greenhouse gas inventory
reporting instructions Revised IPCC Guidelines for national greenhouse gas
inventories. In: United Nations Environment Program, the Organization for Economic
Co-operation and Development and the International Energy Agency, London.
IPCC - Intergovernmental Panel on Climate Change., 2007. Climate Change 2007:
Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the
Intergovernmental Panel on Climate Change. B. Metz, O.R. Davidson, P.R. Bosch, R.
Dave, L.A. Meyer (eds). Cambridge University Press, Cambridge, United Kingdom and
New York, NY, USA.
Luken, R., Castellanos-Silveria, F., 2011. Industrial transformation and sustainable
development in developing countries. Sustainable Development 19: 167-175.
Mao, J., Du, Y., Xu, L., Zeng, Y., 2011. Quantification of energy related industrial eco-
efficiency of China. Frontiers of Environmental Science and Engineering in China. doi:
10.1007/s11783-010-0289-8.

Proceedings of the 10
th
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MCT Ministrio da Cincia e Tecnologia, 2006. Emisses de dixido de carbono por
queima de combustveis: abordagem top-down. Available at: <http://www.mct.gov.br>.
(Accessed 05.11.10).
Scheneider, M., Romer, M., Tschudin, M., Bolio, H., 2011. Sustainable cement
production - present and future. Cement and Concrete Research 41(7): 642-650.
Silva, F. I. A., Guerra, S. M. G., 2009. Analysis of the energy intensity evolution in the
Brazilian industrial sector - 1995 to 2005. Renewable and Sustainable Energy Reviews
13(9): 2589-2596.
Simes, A., La Rovere, E. L., 2008. Energy Sources and Global Climate Change: The
Brazilian Case. Energy Sources Part A: Recovery, Utilization & Environmental Effects
30: 1327-1344.
Tomasula, P. M., Nutter, D. W., 2011. Mitigation of Greenhouse Gas Emissions in the
Production of Fluid Milk. Advances in Food and Nutrition Research 62: 41-88.
Wernet, G., Mutel, C., Hellweg, S., Hungerbhler, K., 2011. The Environmental
Importance of Energy Use in Chemical Production. Journal of Industrial Ecology 15(1):
96-107.


Proceedings of the 10
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15. Efficiency in the management
of sanitation and its impacts on
health promotion: an aplication
of data envelopment analysis
DEA
Karlos Eduardo Arcanjo da Cruz
Universidade Federal de Pernambuco, Brazil, karlosarcanjo@hotmail.com
Francisco de Sousa Ramos
Universidade Federal de Pernambuco, Brazil, fsr@ufpe.br
ABSTRACT
This paper analyzes the public administration efficiency regarding the attenuation of
infant mortality. In many Brazilian regions there is a low coverage of sanitation
systems. This deficit in supply per se is directly associated with under five mortality.
However, the poor quality supply of service also causes a similar effect. Thus, this
paper analyzes the efficiency of the Brazilian states in the management of sanitation.
To do this, it was considered as the primary objective of sanitation to improve the
population welfare, which is translated by the elevation in the number of over-five-
year children who were born survivors for each thousand. As a result, it was found
that all the states in the South region are efficient, while the Southeast are not as good
as these, but have a score close to 100%. Northeast states show a low efficiency. In
the north, most of the units was ineffective, but better than the northeast units. When
comparing these results with the indicator of infant mortality, it is perceived that in the
Northeast the scarcity of infrastructure is complemented by the inefficiency and
produces a perverse effect that makes the region have the highest Under Five
Mortality Rate nationally.
Keywords: Sanitation, Infant Mortality, Efficiency, DEA.
Introduction
Services of Water Supply and Sewage Collection (SWSSC) in many developing
countries is quite impaired and very far from achieving universal service (Turolla,
2002; RIVERA, 1996). Over 2.6 billion people worldwide lack access to adequate
sanitation system and approximately 900 million people do not use drinking water
(WHO, 2010).
According to the World Health Organization, the inappropriate use of sanitation and
water is a major risk of mortality. It also has an additional adverse effect to be more
connected to regions of low income - 99% of its occurrence is in developing
countries. It is associated to a group of five risk factors that together account for 25%

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of global mortality and 84% of these deaths associated to children (WHO, 2009).
Moreover, it is directly associated to diarrhea, which is one of the major causes of
mortality of children under 5 years (BLACK et al., 2003).
The United Nations Children's Fund (UNICEF) prepares a ranking of countries
according to the number of children under five years who die per 1,000 born in the
year, called Under five Mortality Rate - U5MR. In other words, it measures the
probability that a child has to die before its fifth birthday. This indicator is a "smaller is
better." In the list of 2007, Brazil has a U5MR of 22 children, which puts it in an
intermediate position, the 107th. This situation is worse than Peru (with 20 children of
U5MR), Colombia (20), Argentina (16) and Uruguay (14) (UNICEF, 2009), all these
countries belong to Latin America.
One possible cause for this result is the low percentage of the population that is
served by the essential services of sanitation: according to information from the
National Sanitation held in 2008, the country has only 44% of households with access
to the general network sewage and has 78.6% of households with access to the main
water supply, which represents more than 12 million households without access
(BRAZIL, 2008).
Furthermore, according to this research, in 2008, as regards the quality of water, 18%
of the Brazilian municipalities distributed water without any treatment (flocculation,
settling, filtration and disinfection) in which region that had the largest number of
municipalities in this situation was the North (20.8%) followed by the Northeast
(7.9%). In 23.4% of the municipalities water rationing occurred, and the Northeast
region with the highest percentage of water rationed, with 40.5% of its municipalities
in rationing.
Regarding to efficiency, on average, 40% of water injected into the network is lost -
are not billed (SNIS, 2008). This indicator reflects the number of leaks occurring in the
country, the low rate of micro-measurement and underpricing. It is a sign of high
inefficiency in the sector (WHO, UNICEF, 2000 p 25), which may be due to the
prevailing institutional structure, the federal conflicts and cross-subsidy.
Thus, the fact is that the coverage index of the national SWSSC is far from desired.
However, this is not the only problem in the sector: the quality of provision of this
service is another problem because it has not proven satisfactory, since the percentage
of municipalities that do not treat the water supplied is considerable or even those
who work under the regime of rationing - and that the loss rate of billing is high. This
makes clear that the sector problem is not only the deficit of the service, but also in
efficient management of sanitation. Therefore, this level of efficiency needs to be
measured, so that public agents can interfere with the sector to ensure that resources
are used in the best possible way and more lives can be saved.
The aim of this study is to measure how effective are the Brazilian state governments
in the management of sanitation to improve the population welfare with the reduction
of child mortality for children under five years old. The methodology chosen for this
was the DEA.


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Methodology
In Brazil, the value of the U5MR is high and uneven across geographic regions. In
2007, 24 of every 1,000 children born, died (DATASUS, 2007). This indicator is more
pronounced in the poorest regions of the country, North and Northeast. It is a fact that
this rate has decreased over the years - mainly in the 2000s as is shown in Graph 1.
However, this inter-regional inequality is not necessarily a management issue, it may
exist due to scarce resources, given that the same regions are the ones with the worst
indicators of coverage for water supply networks (WS) and Coverage by and sewage
collection networks (SC).
Brazilian states, as making-decision units (DMU), use the existing infrastructure to
combat the mortality of children under 5 years. The mechanism by which these
resources are managed can be described by a production function, even if unknown.
However, the product of this function is, by definition, non-decreasing in relation to
inputs. Thus, the U5MR will not be used as the output, but as the number of children
who survive (U5SR), defined by equation 1.
U5SR = 1.000 U5MR. (01)
Once the indicator U5SR defined as output, define the possible inputs to remaining
possible inputs. Sanitation is one of these because there is a significant association
between the quality of it and the product. It is composed of four elements: (1) water
supply, (2) wastewater collection and treatment, (3) solid waste management and (4)
storm drainage. WS and SC indicators will be inputs of the production function, since
they account for items 1 and 2. For items 3 and 4, Degree of Urbanization (DU) will be
the used indicator as a proxy for them, since in urban areas is expected that these
services are performed.
The aim of the work is to analyze the efficiency of sanitation, however, other
indicators may be important for this analysis, since the product is an indicator that
involves economic and social factors. Thus, two possible inputs are the number of
doctors by a group of 1,000 inhabitants (DBI), as a proxy for hospital infrastructure,
since the reduction of infant mortality depends on the medical monitoring in the early
days of life and even vaccinations and medicines, and Gross Domestic Product per
capita (GDPPC), because they believe that wealthier states may use more healthcare
resources and the richest people can have access to better conditions for their
children.
To determine the importance of each variable, an analysis of correlation between
them was performed, which is shown in Table 1. From the table, there is a positive
association between the indicator U5SR and the other variables.



Proceedings of the 10
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Graph 1 Mortality rate evolution in less than 5 years old.

Source: elaborated by the author by means of data extracted from DATASUS (2007)
There is a strong correlation between the indicators DU and DBI. This perhaps be due
to the more urbanized regions hold a greater attractive power, and therefore it is
natural that there is a greater concentration of physicians in these areas. Also there is a
strong correlation between DBI and GDPPC, which may occur for the same reason:
the richest regions can attract more doctors, both in the private or public
On the other hand, according to UNICEF (2010, p. 14), there is a significant
relationship between GU and underweight, so that, in developing countries, there is a
concentration twice higher for underweight children in rural areas compared to urban
areas. The underweight is directly linked to four factors: food deficit in terms of
quality and quantity; sanitation and inadequate health services, lack of care and
feeding practices.
It is also observed, from the table, that the WS and U5SR correlation is low, despite
being significant. This may indicate that the coverage of water supply systems has no
significant effect on infant mortality, or that these systems are operating inefficiently in
many states, which possibly reduces the positive effect. The second option is more
likely, and hence the indicator will be remained in the model.
The main object of study is the efficiency of sanitation on health promotion, so that
the model used in the research will be called Model 1 and it will have as inputs WS,
SC and DU. The method used was the BCC. As a guideline for the optimization, it was
considered a maximization of the product, given the levels of available inputs.



Regio Norte; 2000;
33,35
Regio Norte; 2001;
32,17
Regio Norte; 2002;
30,97
Regio Norte; 2003;
29,74
Regio Norte; 2004;
28,59
Regio Norte; 2005;
27,64
Regio Norte; 2006;
26,95
Regio Norte; 2007;
26,32
Regio Nordeste;
2000; 48,81 Regio Nordeste;
2001; 45,56
Regio Nordeste;
2002; 43,28
Regio Nordeste;
2003; 40,97
Regio Nordeste;
2004; 38,87
Regio Nordeste;
2005; 37,3
Regio Nordeste;
2006; 36,19
Regio Nordeste;
2007; 35,2
Regio Sudeste;
2000; 22,12
Regio Sudeste;
2001; 21,16
Regio Sudeste;
2002; 20,2
Regio Sudeste;
2003; 19,89
Regio Sudeste;
2004; 18,92
Regio Sudeste;
2005; 17,92
Regio Sudeste;
2006; 17,69
Regio Sudeste;
2007; 17,08
Regio Sul; 2000;
19,93
Regio Sul; 2001;
19,46
Regio Sul; 2002;
18,65
Regio Sul; 2003;
18,82
Regio Sul; 2004;
17,53
Regio Sul; 2005;
16,1
Regio Sul; 2006;
15,84
Regio Sul; 2007;
15,11
Regio Centro-
Oeste; 2000; 25,12
Regio Centro-
Oeste; 2001; 24,49
Regio Centro-
Oeste; 2002; 23,24
Regio Centro-
Oeste; 2003; 22,56
Regio Centro-
Oeste; 2004; 22,18
Regio Centro-
Oeste; 2005; 21,23
Regio Centro-
Oeste; 2006; 20,54
Regio Centro-
Oeste; 2007; 20,18
Brasil; 2000; 31,99
Brasil; 2001; 30,56
Brasil; 2002; 29,13
Brasil; 2003; 28,09
Brasil; 2004; 26,62
Brasil; 2005; 25,36
Brasil; 2006; 24,77
Brasil; 2007; 24,07
Regio Norte
Regio Nordeste
Regio Sudeste
Regio Sul
Regio Centro-Oeste
Brasil
U5MR

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Table 1 Analysis of correlation between variable

U5SR WS SC DU DBI GDPPC
SOB5 1.0000
CA 0.3911 1.0000
CE 0.5667 0.5656 1.0000
GU 0.7156 0.6527 0.4622 1.0000
MPH 0.6121 0.6443 0.6652 0.7563 1.0000

PIBPC 0.7228 0.4882 0.6009 0.6961 0.8607 1.0000
Source: elaborated by the author by means of the softwareEviews 7.0.
Results and discussion
The result of linear programming for the chosen model is shown in Table 3, in which
the Local Technical Efficiency is presented by the BCC.
Table 3 Local Technical Efficiency of the states in management in sanitation.
Rank State BCC (%) U5SR Rank State BCC (%) U5SR
1 DF 100 986.69 11 AP 99.43 975.38
1 RO 100 975.07 12 MG 99.41 979.28
1 PR 100 984.49 13 AM 99.31 974.08
1 SC 100 985.43 14 AC 99.02 966.51
1 MT 100 977.62 15 CE 98.97 969.17
2 RS 99.98 985 16 PI 98.97 966.49
3 ES 99.89 983.22 17 BA 98.7 965.62
4 GO 99.87 979.12 18 MA 98.68 965.25
5 MS 99.85 976.72 19 SE 98.58 965.16
6 SP 99.84 984.84 20 RN 98.52 965.62
7 RJ 99.67 982.85 21 PE 98.41 965.2
8 RR 99.59 979.64 22 PB 98.25 963.03
9 PR 99.57 973.32 23 AL 97.34 950.79
10 TO 99.46 973.06
Source: elaborated by the author

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Thus, one can assume that there is a clear need for improvement in the quality of
sanitation services in the northeastern states, for they have not made good use of
existing infrastructure. Possibly, there must be elements that affect efficiency, but were
not considered in the model. The DBI, which is a proxy for hospital infrastructure and
was neglected in Model 1, may be affecting the efficiency of the state. Similarly, the
GDPPC also exogenously may be affecting the efficiency of states.
One factor to be considered is that water availability in the Northeast is far from a
considerable extent in other regions of Brazil. This element can also influence the
efficiency of the state to providing the essential elements for reducing infant mortality.
Years of studies for over 25 years - which, as a proxy, can be interpreted as the level
of knowledge of health education and knowledge of rights and duties - have a great
inequality between geographic regions, so that the North and Northeast are below on
average.
For an analysis of the elements that are possibly impacting the efficiency of the
States, it was considered the linear regression model, which has TE (technical
efficiency) as the dependent variable, and as independent variables, the average of
years of studies for people over 25 years of age (ST), obtained from the IPEA; the
relation between the municipalities population under the rule of state and the total
population of the state (CONT), with the information on the population obtained in
the SNIS (2007) and IBGE, the Population Density (PD), obtained from the IBGE; Per
Capita Water availability (PCWA) (m3/inhabitant.ano) obtained in Lima (2001), and
GDPpc. The model is shown in equation 4.
= +
1

+
++
2

+
+
3

+
+
4

+
+
5

+
+
6

+
(04)
The regression result is shown in Table 4, in which it is possible to verify that the
indicator ST had no significant effect on the model or on the indicator PCWA. Thus, it
cannot join the issues of water availability the inefficiency model nor the education of
the population.
Table 4 Linear Regression of TE in relation to the socio-economic indicators
Indicator Coefficient Test-t p-value
GCPPC 0.0001 2.9580 0.0075
DBI 0.7105 2.1013 0.0479
PD -0.0079 -4.2991 0.0003
PCWA 0.0000 0.4214 0.6777
ST 0.0051 0.1298 0.8980
C 97.9028 347.2115 0.0000
Source: elaborated by the author with the use of Eviews 7.0 / R
2
adjusted= 0,6
It is noteworthy, however, that the PCWA used here may not measure the situation
well, because the water shortage problem is a micro-regional one, and aggregating by
states, this information may not be well captured by the indicator. The attention

Proceedings of the 10
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given to health can be important for the efficiency of sanitation systems, since the DBI
indicator shows a positive effect on the dependent variable, which indicates that not
enough investment in sanitation, but it is also necessary to improve the hospital
infrastructure so that the sanitarian policies have a higher efficiency.
The indicator population density showed a negative relation with efficiency. This
information can be an indication that a concentration of population in excess can
hinder the carrying out of the work of health teams, impeding the company of
working optimally. The GDPpc has a positive effect on efficiency, which may point to
the richest states get greater efficiency in the management of sanitation. One
possibility for this is that a richer state may involve mitigation measures for sanitation
that were not captured in the model, or a better buying power allows people to
protect themselves against the inefficiency of sanitation.
Conclusion
In this study, we analyzed the technical efficiency of the state governments in
administering the sewerage, which is directly associated with reduced infant mortality.
For this analysis, we used the DEA methodology oriented to the maximization of the
product. As a result, states with 100% of technical efficiency are divided into three
geographic regions of the country, in a total of five: two in the South, one North and
two in the Midwest. In the North, states have not been efficient, but efficiency
achieved scores above the northeastern states, even having an infrastructure below to
these, either through coverage of basic sanitation, by number of physicians or by per
capita income. This result clearly shows the inefficiency of the Northwest states, which
make them to have the highest U5MR.
Thus, we perceive the need for quality improvement in the provision of sanitation
services, for its whole service whole is not limited to providing water and sewage
services to citizens. A better control is essential over the quality of this offer, since
when comparing the effectiveness of services between the states, it is noted that there
is an inequality, especially among geographic regions, which further contributes to the
social inequality in the country.
References
BLACK, R. E.; MORRIS, S. S.; BRYCE, J (2003). Where and Why are 10 million children
dying every year? The Lancet. V. 361,p. 2.226-2.234.
BRASIL (2008). Ministrio das Cidades. Pesquisa Nacional de Saneamento Bsico,
Braslia, DF.
DEPARTAMENTO DE INFORMTICA DO SUS DATASUS (2008). Informaes de
sade epidemiolgica e de morbidade causa por local de Residncia. Disponvel em:
www.datasus.gov.br.
LIMA, J. E. F. W. (2001) Recursos hdricos no Brasil e no Mundo. Ministrio da
Agricultura Pecuria e abastecimento. Planaltina: Embrapa Cerrados.


Proceedings of the 10
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International Conference on DEA Brazil2012 113
RIVERA, D. (1996). Private sector participation in the water supply and wastewater
sector, lessons for six developing countries. Word Bank, Washington, DC.
SISTEMA NACIONAL DE INFORMAES EM SANEAMENTO SNIS (2008).
Diagnstico dos servios de gua e esgoto. Braslia.
TUROLLA, F. A. (2002). Poltica de saneamento: avanos recentes e opes futuras de
polticas pblicas. Braslia. Ipea.
UNITED NATIONS CHIDRENS FUND UNICEF (2010). Progress for children:
Achieving the MDGs with equity. UNICEF, New York.
UNICEF (2009).The States of The Worlds Children 2009. UNICEF, New York.
WORLD HEALTH ORGANIZATION WHO (2010).water global annual assessment of
sanitation and drinking-water (GLAAS) 2010: targeting resources for
better results. WHO Library, Switzerland.
WORLD HEALTH ORGANIZATION WHO (2009). Global health risks: mortality and
burden of disease attributable to selected major risks. WHO Library, Switzerland.
WHO; UNICEF (2000). Global Water supply and sanitation assessment 2000 report.
Switzerland.


Proceedings of the 10
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16. Efficiency of Three Outliers
Detection Tests on Non-
Parametric Frontiers Methods
Victor Maia Senna Delgado
Al. Accias, 31275-150, Belo Horizonte, MG, Brazil - FJP, victor.maia@fjp.mg.gov.br (corresponding
author)
Igor Viveiros Melo Souza
R. Catete, 35420-970, Ouro Preto, MG, Brazil - UFOP, igorviveiros@gmail.com
Abstract
One of the most important problems concerning non-parametric frontiers is the
detection of outliers, influential information that distorts statistical analysis. This topic
has been present for a long time in the literature of non-parametric statistics. Wilson
(1995) used the test proposed by Andrews and Pregibon (1978) to apply one of the
first empirical statistical tests to detect outliers on convex sets of non-parametric
frontiers. Since then, a series of proposals for the detection and treatment of outliers
has emerged in the field of non-parametric frontiers. The purpose of this research is to
highlight three methods of outlier detection: Wilson (1995), Simar (2003), Sousa and
Stosic (2005), and also answer which one is more efficient in statistical terms, lower
bias and variance.
Keywords: Outliers Detection Methods; Non-Parametric Frontiers; Data Envelopment
Analisys; mask effect; Monte-Carlo simulation.
Introduction
One of the most important problems concerning non-parametric frontiers is to control
its borders to outliers, influential information that distorts statistical analysis. Any
Outlier Detection Method (ODM) must help the researcher to isolate wheat from the
weeds, and because most of them grow together, many times, its very hard to
separate which one observation is not part of a particular bunch of data, is necessary
a queer eye-detector to do it right with no help of detection procedures.
The ODMs has been present for a long time in the non-parametric statistics literature.
Wilson (1995) used the test proposed by Andrews and Pregibon (1978) to apply one
of the first empirical statistical tests to detect outliers in convex sets of non-parametric
frontiers.
Since then, a series of proposals for the detection and treatment of outliers has
emerged in the field of non-parametric frontiers. The purpose of this research is to
highlight three methods of outlier detection: the already mentioned Wilson (1995),
and also Simar (2003) and Sousa and Stosic (2005). The purpose is to answer which
one is more efficient in statistical terms, lower bias and variance.

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In order to make comparisons between different methods, we used the same Data
Generator Process (DGP) to construct the frontier, and the outliers were kept fixed,
they are the same between the three methods. The methods were compared with
optimal threshold outlier detection value for each. The first results show advantages of
Wilson (1995) and Sousa-Stosic (2005) to obtain large single outliers, but with small
efficacy to detect outliers altogether, Sousa-Stosic has very large variance at some
points. Simar (2003) is the more efficient test to detect outliers altogether and to
minimal variance, but with small efficacy to detect particular individual outliers.
Methods
Three outliers detection methods (ODM) applied to non-parametric frontiers will be
studied: the AP-Wilson statistic, named APW for short; the statistic from Simar Test
(ST) developed by the approach of Cazals, Florens and Simar (2002) and Simar (2003).
And the statistics of Sousa-Stosic (SS) developed by Sousa and Stosic (2005). These
three methods have considerably creative and different approaches to the problem of
detecting outliers.
These three statistics are:
APW: | | | | ) 1 ( * *' det * *' det
) (
X X X X
i
L S
i
L S
R

=

ST:

) 2 ( ) , (
~ 1
) , (

1
0 0 0 0
=
=
B
b
b
m
b
m
y x
B
y x

SS:
( )
) 3 (
1
; 1
2
,

=

=
n
n
i s s
s i s
i


Where X* is the [XY] matrix of information, with X representing the set of inputs and
Y representing the set of outputs. The dataset element, or decision maker units
(DMUs), is S = {1, 2, , n}, which i represents any particular observation from S. L is
a subset of S (L

S) and det[X*X*]i(S-L) represents the determinant of X* for one


particular i in S without the subset L.
The Simar's statistic test is just efficiency index (i), usually attained with the distance
from DMU i to its frontier projection DMU (i). Where x0 and y0 are values for x and
y for one arbitrary point, m is the sample size (trimming parameter), and b is the
bootstrap index of one particular replication with maximum of B. In this paper, for
sake of simplicity, m = B = 100. Also, j is the number of outputs in the Y variable set
(n p). Where n is the maximum number of observations pertaining to S, and p is the
number of outputs.
Usually the Shephard-efficiency (=1.00) indicates maximum efficiency and 1.00 is
reserved to inefficiency. But in this case, with trimming parameter, its possible to
obtain super-efficiency (<1.00), values of (efficiency index plus or minus a
small delta) are used to indicate the outliers.
The i is the statistic SS mentioned above, s is any element of S-set described above.
The s,i is the efficiency index without the subject information i, also belonging to S,
(s i). If the DMU i is influent the sum of (s,i s)2 will be positive and greater

Proceedings of the 10
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than zero. The statistical i removes the observations one by one and verifies it
influence, greater values of i denotes potential outliers.
Equipped with the three statistics listed in the previous section, one natural question
that emerges is Which one to pick up? The reasonable answer must state that the
better statistic is the one with greater aim and accuracy, in statistical terms, less bias
and small variance.
To control the precision its necessary to know the Data Generating Process (DGP) of
the real data and the generator of the fake ones (Outliers Generator Process OGP).
The more intersection exists between these two process, more difficult is to separate
the wheat from the weeds. Following the process suggested by Simar (2003, p. 405),
we have the following production function technology:
Y = X

*exp(-U) (4)
Where Y and X are outputs and inputs, here and in all paper, these are vectors are
(n1) dimension. The = 0.5 and U is uniform on (0,1), so, exp(-U) have mean =
, and the output-efficiency mean is 32. The OGP is also here arbitrary and
somewhat similar to Simars, but apart from paper of Simar, we chose 90 observations
of process above and 10 outliers, summing up to 100 DMUs and a proportion of 0.1
outliers in database (Table 1 brings the outliers values).
Table 1 - Values of Outlier Generating Process
Outlier id. Y X
91 0.004 0.100
92 0.025 0.190
93 0.035 0.240
94 0.100 0.700
95 0.500 0.900
96 0.700 1.000
97 0.750 1.050
98 1.000 1.000
99 1.200 1.000
100 1.100 1.100
For now on, we made means to compare different ODMs, called statistic *. This
statistic is based on simple proportion of all outliers detected by the method (
i
) over
all true outliers ():
) 5 ( 1 *
1 1
|
|
.
|

\
|

|
|
.
|

\
|
=

= =
n
i
i i
n
i
i
T
n


The term in first parenthesis is useful for one penalty to over identification. On the
limit, a weak threshold could identify all true outliers identifying all observations as
outliers. To avoid this, the penalty was suggested, if one ODM detects all n

Proceedings of the 10
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observations as outliers, the * will become zero. Another change from the previous
equation is the Identification vector (T
i
) that enables the term in second parenthesis
capture only true outliers.
2

With the previous statistic is possible to compare the three different ODMs, but to be
fair with all three methods, is necessary to find out the best possible threshold value to
each one, the value that maximizes the identification with no penalty loss.
To identify the maximum threshold, all the other parameters must be fixed. It was
used all data, with one particular realization of equation 6 for all 90 non-outliers
points, and 10 fixed outliers. If we had continuity and second order condition
satisfied, to discover the maximum we need the derivative of * with respect the
threshold value (): *() = 0.
Table 2 presents the values of threshold and the maximum value of * for each
method, the first is computational statistic of maximum, the second is obtained by
optimize function of R language.
Table 2 - Optimum values for the threshold of each Method.
Computational Optimize
APW 0.965 0.966
ST 1.085 1.095
SS 0.020 0.121

To compare three different methods with only one database is insufficient to build
confidence intervals and pronounce about reliability of indicators. One idea to
compare empirically three different methods is Monte Carlo simulations. The
simulation was composed by 2000 replications of equation (4) with ninety
observations each (DGP) and the ten outliers were kept fixed.
In the first procedure, the outliers were added one by one until they sum up 10. This
procedure identifies the method capacity of identify all outliers and to control mask
effects. The routine is described:
Run the equation (6) and obtain 90 observations for each.
Append to each replication the first outlier kept fixed (from table 1).
Replicate step 1 and 2 2000 times.
Save the mean and sampled standard deviation () of the * statistic.
Obtain the confidence interval (CI) with 5% for (error type I and supposing
normal distribution).

2
If the ODM is really unbiased the term in second parenthesis will be 1.00, and with n = 100, the first
penalty term should not trespass 0.9, therefore, the maximum * is 0.9 with ten outliers. For only one
outlier this maximum is 0.99.

Proceedings of the 10
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Do steps above more 10 times, adding to step 2: first up to second, first up to
third, and so on until the tenth outlier.
In the second procedure, outliers were added one (and only one) by time until all ten
were analyzed. This procedure identifies the method capacity to point one outlier per
time: if that was the only outlier, how the ODM should be doing? The routine is very
similar to the previous described, with exception of sixth step, which adds one outlier
per time.
Results and discussions
As results for first procedure we have that the SS method is the best result to this first
Monte Carlo procedure, mean of 0.883 for first outlier (91
th
DMU) and 0.869 to second
(92
th
). But for all three first outliers the confidence interval of SS method is very large,
maybe because its leverage properties of being in frontier, this introduces greater
variance because more sparsely data in frontier region.
The Simars ODM greatly improves from the fourth outlier beyond, its the better
method to identify outliers from 94 to 100, with relativity small variance and mean
over 0.8 for statistic (*). The APW method does not captures the first three outliers.
Despite that, the APW method improves at each outlier added, with very small, but
increasing, variance from 94
th
to 97
th
. Although the maximum value at 0.549 is far
below the ST at final outliers, with relatively same variance.
As discussed by Wilson (1995), the mask effect should be important here for APW and
SS methods. Table 3 shows the results for three ODMs pointing the central statistic
and standard deviation with confidence interval of = 5% (1.96).
In Table 4, the capacity of identify each outlier per time is investigated. Remembering
that the maximum * value is .99 to next simulation. The capacity of SS method for
identify the seven first outliers (from 91 to 97) is very high, dropping drastically for
98
th
and 99
th
. These two observations should be not declared as outliers by the SS
method. Again, the confidence interval for SS method is very abroad to 91, 92, 93, 98
and 99.
The APW shows better results identifying the outliers one per time, with the exception
of the first three (91, 92, 93) which are note declared outliers by this method. Our
hypothesis is that the identification one per time excludes the mask effect that
prejudices APW and SS ODMs. Meanwhile, ST do not so well to identify one per time,
probably because there is over identification of false outliers, and it increases the
penalty for ST method (maybe one different threshold should be applied to this part).
Next section investigates this possibility in detail.


Proceedings of the 10
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Table 3 - Results for Outliers added one by one until sum up ten
Ap.wilson Simar test Sousa-Stosic
Outliers * CI_min CI_max * CI_min CI_max * CI_min CI_max
91 0.000 0.000 0.000 0.000 0.728 0.037 0.656 0.800 0.883 0.268 0.358 1.407
92 0.000 0.000 0.000 0.000 0.738 0.036 0.667 0.810 0.869 0.197 0.483 1.254
93 0.000 0.000 0.000 0.000 0.738 0.035 0.669 0.808 0.583 0.123 0.342 0.824
94 0.206 0.006 0.194 0.218 0.845 0.027 0.791 0.898 0.485 0.003 0.480 0.490
95 0.335 0.010 0.315 0.355 0.888 0.023 0.842 0.934 0.579 0.003 0.573 0.585
96 0.423 0.012 0.399 0.447 0.903 0.018 0.868 0.939 0.484 0.001 0.482 0.486
97 0.485 0.012 0.461 0.509 0.903 0.015 0.873 0.933 0.415 0.001 0.413 0.417
98 0.530 0.013 0.505 0.555 0.893 0.016 0.862 0.924 0.363 0.001 0.362 0.365
99 0.564 0.015 0.535 0.593 0.883 0.015 0.853 0.913 0.323 0.001 0.322 0.324
100 0.589 0.019 0.552 0.626 0.875 0.015 0.846 0.904 0.325 0.045 0.236 0.414

Table 4 - Results for Outliers added one per time
Ap.wilson Simar test Sousa-Stosic
Outliers * CI_min CI_max * CI_min CI_max * CI_min CI_max
91 0.000 0.000 0.000 0.000 0.726 0.037 0.653 0.799 0.899 0.243 0.422 1.375
92 0.000 0.000 0.000 0.000 0.731 0.037 0.659 0.803 0.954 0.097 0.765 1.144
93 0.000 0.000 0.000 0.000 0.737 0.038 0.661 0.812 0.966 0.011 0.945 0.987
94 0.814 0.026 0.764 0.864 0.831 0.033 0.766 0.895 0.972 0.007 0.959 0.986
95 0.805 0.027 0.753 0.858 0.781 0.034 0.714 0.849 0.969 0.010 0.949 0.990
96 0.804 0.027 0.752 0.857 0.760 0.034 0.692 0.827 0.968 0.010 0.950 0.987
97 0.805 0.026 0.755 0.856 0.758 0.036 0.687 0.829 0.969 0.010 0.949 0.988
98 0.792 0.026 0.741 0.843 0.713 0.038 0.638 0.788 0.738 0.408 -0.062 1.537
99 0.790 0.026 0.740 0.840 0.714 0.040 0.636 0.791 0.277 0.435 -0.576 1.131
100 0.795 0.025 0.746 0.844 0.713 0.039 0.637 0.788 0.954 0.101 0.755 1.152
Conclusions
Its hard to be conclusive to answer the question Which ODM is better? There is
some indication that Simars method (2003) is the better one for detect bunch of
outliers, and do it with great confidence, because small interval and small
misidentification. With correct threshold, the SS is the better one to detect outliers 91,
92 and 93 in two Monte-Carlo procedures and the more powerful method to detect

Proceedings of the 10
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one outlier per time. With exception of observations 98 and 99, that SS method
virtually does not detect.
As SS, the APW method does better for identify outliers one per time. With the
advantage of have smaller variance than the others for 91, 92 and 93 and for 98, 99
and 100. The APW appears to be the better method to see super inefficient outliers,
points very internal in production set. This also appears in ROC analysis and suggests
powerful performance for large outliers in large data. Due to the mask effect, both
methods (APW and SS) did not dispense visual inspection of researcher, which
becomes a limitation for large databases.
One additional future advance for this research is to investigate how these three
methods behave for more dimensions (more than 1-output and 1-input framework)
and for other technology process, increasing and mixed returns. Its also an extra topic
to apply this analysis to other well-know databases that could also lead to interesting
results.
And, finally, it seems, for us, that a promising method can blend the best qualities of
each ODM discussed here. One possibility of doing this is to take the maximum
expectancy of each method in its best extend of outlier detection.
References
Andrews, D., D. Pregibon (1978) Findings the outliers that Matter, Journal of the Royal
Statistical Society, series B, 40 (1): 85-93.
Cazals, C., J. Florens, L. Simar (2002) Nonparametric frontier estimation: a robust
approach, Journal of Econometrics106 (1): 1-25.
Simar, L. (2003) Detecting outliers in frontier models: a simple approach, Journal of
Productivity Analisys, 20 (3): 391-424.
Sousa, M.C.S., B. Stosic (2005) Technical efficiency of the Brazilian municipalities:
correcting nonparametric frontier measurements for outliers, Journal of Productivity
Analysis 24 (2): 157-181.
Wilson, P.W. (1995) Detecting Influential Observations in Data Envelopment Analysis,
Journal of Productivity Analysis 6 (1): 27-45.

Acknowledgements
The authors thank the support of Centro de Estudos de Polticas de Pblicas of
Fundao Joo Pinheiro (CEPP/FJP) for technical and finance support to the
presentation in the 10
th
DEA international congress. Like many others Operational
Research Professionals, we also regret the passing of Professor W.W. Cooper, one of
those who made DEA meeting possible. All possible remaining flaws are responsible
exclusively by the authors and not their institutions and collaborators.


Proceedings of the 10
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17. Evaluation of the
Benchmarking Model Proposed
by the Brazilian Electricity
Regulator for Energy
Distribution Companies: The
Case of Tariff Revision
Giordano Bruno Braz de Pinho Matos
CEPEAD, UFMG, Brazil, giordano.matos@cemig.com.br
Marcelo Azevedo Costa
UFMG, Brazil, azevedo@est.ufmg.br
Ana Lcia Miranda Lopes
CEPEAD, UFMG, Brazil, analopes.ufmg@gmail.com
Roberta de Cssia Macedo
CEPEAD, UFMG, Brazil, roberta.c.macedo@gmail.com
Abstract
In 2011 the Brazilian Electricity Regulator - ANEEL implemented a benchmarking
model to evaluate the operational efficiency of the electrical power utilities in Brazil.
This model is based on two benchmarking methods widely applied by other
regulators: Data Envelopment Analysis - DEA and Corrected Ordinary Least Square -
COLS. The aim of this paper is to identify the cause of discrepancies between the
results obtained by applying DEA and COLS models and also to discuss the use of a
non- decreasing returns to scale(NDRS) DEA model by the regulator. It is shown that
the differences between the parametric (COLS) and non-parametric (DEA) models are
mainly due to the unsuitability of the Cobb-Douglas model as a cost function, by the
effect of the sample size which shifts the COLS's efficiency scores towards smaller
values, and because of the DEA model type NDRS.
Introduction
In September 10, 2010, the Brazilian National Electric Energy Agency - ANEEL started
to debate with the society about the rules and methodologies for defining the
revenues of electricity distribution utilities in the 3rd Periodic Tariff Review Cycle
(3PTRC), through the public hearing 040/2010 (AP040). By means of the technical
note 265/2010 the regulator proposed a full review on the model which calculates
regulatory operational costs. The definition of efficient operating costs is a central
point in the incentive regulation, because it has been chosen for regulating natural

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th
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monopolies in the Brazilian electricity sector after their privatization in the nineties.
The incentive regulation requires the definition of a level of revenue or rate for a fixed
period of time, which is defined in a formal contract. Given the level of rates or
revenues defined by the regulator, the companies are encourage to reduce their costs
to lower levels in order to achieve higher financial returns. After the concession
period defined in the agreement contract, the costs of the companies are revised, i.e.,
the regulator defines new levels which are considered more efficient. In this case,
these new efficiency levels are proposed by the regulator for the benefit of
consumers. Therefore, it is crucial for both the regulated company as for consumers a
consistent methodology for the definition of operational costs.
The Data Envelopment Analysis (DEA) benchmarking method was first considered by
ANEEL because it has been successfully applied by other regulatory agencies from
Austria, Britain, Belgium, Finland, Netherlands, among others. Therefore, it is of
interest of ANEEL to replace previous benchmarking models by a concise and robust
approach, like DEA. By applying DEA, the operating cost of each company is
compared to the costs/results of the remaining companies and, by means of a linear
system of equations, an efficiency frontier is calculated. The final results of this model
are efficiency scores that indicate the efficiency of each company in transforming
inputs (operational cost) in outputs (electricity consumption, number of customers
and network extension), when compared with similar companies.
Previous studies apply DEA to assess efficiency and productivity change of electrical
power distribution companies (e.g. Arocena, 2008; Bagdadioglu, Price, and Weyman-
Jones, 1995; Hjalmarsson and Veiderpass, 2002; Kumbhakar and Hjalmarsson, 1998;
Pacudan and Guzman, 2002). Estellita et al. (2007) presents a case study of electrical
power distribution companies in which two different DEA models are proposed. The
first modelassess efficiency using previous information from regulators and the second
model assess efficiency using previous information from companies. Thegrell, Bogetoft
and Tind (2005) proposed a multi-period and multi-output model based on costs
related to productivity analysis and a theoretical model of the company (power
distribution companies). Zhou, Ang, and Poh (2008) present results of a survey which
applies DEA in the energy sector and environment.
Based on previous literature review, the aim of this paper is to evaluate the
benchmarking model proposed by ANEEL and to discuss major inconsistencies of the
methodology. Specifically, we aim at identifying the causes of the discrepancy
between DEA and COLS efficiency scores. We also evaluate the use of non-decreasing
returns to scale in the DEA model presented by ANEEL
Methodology
The most commonly used benchmarking frontier techniques include Data
Envelopment Analysis (DEA), Corrected Ordinary Least Squares (COLS) and Stochastic
Frontier Analysis (SFA) (Haney and Pollitt 2009). DEA is a non-parametric method
which requires assumptions of increasing and concave production function (Banker,
Charnes and Cooper 1984). It provides a very flexible function, robust to errors of
misspecification. Both SFA and COLS are parametric methods which require the
specification of a functional mathematical equation, such as Cobb-Douglas or translog

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th
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functions. The main difference between SFA and COLS is that COLS implies that
deviations from the frontier are due to inefficiency only, while SFA considers that
deviations from the efficiency frontier are due to technical inefficiencies and to a
random noise. Although SFA may have a theoretical advantage over COLS model, it is
hard to fit SFA in small samples (CEPA, 2003). Recently, advances in DEA models
allowed deviations from the efficiency frontier to be related to both, inefficiency and
random noise, as in stochastic frontier (BANKER and NATAJARAN, 2008).
The Data Envelopment Analysis - DEA methodology was first introduced by Charnes,
Cooper and Rhodes in 1978 (CHARNES, COOPER and RHODES, 1978) and then
extended by Banker, Charnes and Cooper in 1984 (BANKER, CHARNES and COOPER,
1984). This methodology has been widely used for estimating technical efficiencies of
Decisions Making Units (DMU). DEA is a mathematical programming method that
provides a single measure of efficiency. It is calculated with the use of multiple inputs
and multiple outputs information and results in a frontier which represents the best
practice. From this best efficiency frontier, the relative efficiency of DMUs is
calculated. For each DMU, DEA presents an efficiency score, typically ranging
between zero and 1, which indicates inefficiencies. Furthermore, the DEA efficiency
frontier can be used as a guideline so that inefficient companies can improve their
inputs and outputs and reach the efficiency frontier.
The following DEA models calculate the efficiency score of each DMU j by imposing
different returns to scale. Let be the efficiency score of the reference DMU j. Let y
rk
be the variable that represents the output r (r = 1, ..., R) and x
ik
be the input variable
(i = 1, ...I) for each DMU k. Let be the weights of the observations used as
benchmarking. Model (1) is the CCR model (CHARNES, COOPER and RHODES, 1978),
which assumes constant returns to scale (CRS). Model (2) assumes variable returns to
scale (VRS or BCC) (BANKER, CHARNES and COOPER, 1984). Model (3) assumes
non-increasing returns to scale (NIRS), while model (4) assumes non-decreasing
returns to scale (NDRS).
(1)
(2)
1
1
max
. . , 1,..
, 1,... ;
0, 1,..
CRS
j
N
k rk rj
k
N
k ik ij
k
k
S t y y r R
x x i I
k N

=
=
=
= ;
=
=
1
1
1
max
. . , 1,..
, 1,... ;
1, 0, 1,..
VRS
j
N
k rk rj
k
N
k ik ij
k
N
k k
k
S t y y r R
x x i I
k N


=
=
=
=
= ;
=
= =

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(3)
(4)
ANEEL Proposal
ANEEL proposed, in a first stage of the public hearing (040/2010), two DEA models
organized in two stages. Both models for the first stage used the operational cost as
their input variable and the network extension (km) as the output variable. Model 1
includes the number of customers as the second output variable, while model 2
includes the energy consumption (MWh) as the second output variable. Figure 1
shows the inputs and outputs of each model. Both models assume a non-decreasing
returns to scale (NDRS).

Inputs Outputs
Model 1
Operational Costs
(R$)
Number of Customers
Network Extension (km)
Model 2
Operational Costs
(R$)
Energy Consumption
(MWh)
Network Extension (km)
Figure 1. Proposed model by ANEEL in the first stage of the Public Hearing 040

The data used was from 2003-2010. The electrical distribution companies were split
into two groups. Group A is composed by companies with an annual energy
consumption greater than 1 Terawatt-hour (TWh), whereas group B is composed by
companies with an annual energy consumption below 1 TWh. The DEA method was
applied separately on each group in order to estimate the final efficiency scores.
After to reach the efficient operational cost for each distribution energy company
ANEEL proposed to adjust these scores by environmental variables in a two stage
model.
1
1
1
max
. . , 1,..
, 1,... ;
1, 0, 1,..
NIRS
j
N
k rk rj
k
N
k ik ij
k
N
k k
k
S t y y r R
x x i I
k N


=
=
=
=
= ;
=
=
1
1
1
max
. . , 1,..
, 1,... ;
1, 0, 1,..
NDRS
j
N
k rk rj
k
N
k ik ij
k
N
k k
k
S t y y r R
x x i I
k N


=
=
=
=
= ;
=
=

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After public contributions, ANEEL proposed one DEA model in the first stage,
aggregating all previous output variables. In addition, the regulator proposed a second
benchmarking model known as Corrected Ordinary Least Squares (COLS), and
presented in Technical Note 101/2011. COLS is a parametric model which fits a
regression model by means of ordinary least squares. In sequence, the regression
model is shifted towards the smallest observed value of operational cost, creating the
lower bound or the efficiency frontier of the operational cost. In this case, the
regression model is the Cobb-Douglas production function.
This method is currently used by a few regulators (Denmark and Great Britain), and it
is known to be more restrictive, i.e., it strongly penalizes companies which are not on
the frontier (Bogetoft & Otto, 2011). To overcome this limitation, ANEEL proposed to
average the DEA and COLS efficiency scores and to use the mean value as the first
stage outcome.
In the final decision(november 2011), the energy consumption (MWh) output variable
was replaced by a weighted energy consumption variable which aggregates high,
medium and lower voltage energy consumptions. The weights were chosen to be
proportional to the amount of consumption in the markets of high, medium, and
lower voltage, of each company.
Figure 2 shows the different models presented by the ANEEL for the estimate of
operational costs in each stage of the public hearing.


Figure 2. Phases and models suggested by the Brazilian regulator

Although the methodology proposed by ANEELs was based on the experience of
leading European regulatory agencies, it was subject to criticisms and suggestions
from the Brazilian community and power distribution companies. One of the major
concerns was to use the DEA model with non-decreasing returns to scale (NDRS) as a
replacement to the most commonly used model, the DEA with variable returns to
scale -VRS (BANKER, 1984). Later, a technical report (BANKER, 2011) was submitted
Method Input Varibles Output Variables
DEA Operational Costs (R$) Network lenght (km), Number Customers
DEA Operational Costs (R$) Network lenght (km), Electricity Consumption
Method Input Varibles Output Variables
DEA Operational Costs (R$) Network l enght (km), Number Customers, El ec. Consumpti on (Mwh)
COLS Operational Costs (R$) Network l enght (km), Number Customers, El ec. Consumpti on (Mwh)
Method Input Varibles Output Variables
DEA Operational Costs (R$) Network l enght (km), Number Customers, Wei ghted Consumpti on (Mwh)
COLS Operational Costs (R$) Network l enght (km), Number Customers, Wei ghted Consumpti on (Mwh)
Technical Note 265/2010
Technical Note 101/2010
Technical Note 294/2010

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to ANEEL, providing proper evidence that the VRS model is the appropriate model.
Briefly, even if economic theory argues that non-decreasing returns to scale prevails in
situations of natural monopoly, empirical evidence strongly suggests that VRS achieves
better fit. This is because a mathematical model is an abstract representation, and
without the proper choice of production function, outputs and environmental
variables, such model should not hold on strong assumptions, which is the case of
NDRS
A separate analysis of the estimated efficiency scores of DEA and COLS, presented by
ANEEL, shows that the efficiency scores present major inconsistencies. The efficiency
scores using the COLS model are outstandingly smaller than DEA estimates for all
companies, except for one. Figures 3 and 4 show that the differences between the
results of COLS and DEA reach up to 21% in Group A, and 41% in Group B.


Figure 3. Differences en percentage between COLS and DEA scores for Group A.

-1%
-4%
-5%
-8%
-9%
-1%
-5%
-6%
-12%
-11%
-15%
-3%
-2%
-14%
0%
-17%
-21%
-16%
-6%
-5%
-6% -6%
1%
-18%
-9%
-7%
-12%
-2%
-9%
-23%
-18%
-13%
-8%
-3%
2%

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Figure 4. Differences en percentage between COLS and DEA scores for Group B.

Analysis of inconsistencies of the methodology presented by ANEEL
The COLS model, presented in Technical Note 101/2011, is known to be more
restrictive than other benchmark methodologies, as illustrated in Figure 5. Succinctly,
COLS generates an efficiency frontier which is generally more distant to the data and,
therefore provides smaller efficiency scores for the DMUs.

Figure 5. Comparison of Benchmarking Methods
(SYRJANEN, M., BOGETOFT, P., AGRELL, P. Efficiency benchmarking project B:
Analogous efficiency measurement model based on Stochastic Frontier Analysis, Final
Report, 2006.)
-10%
-19%
-10%
-12%
-16%
-8%
-30%
-13%
-28%
-6%
-11%
-8%
-31%
-12%
-8%
-37%
-11%
-5%
-19%
0%
-4%
-9%
-5%
-9%
-41%
-9%
-7%
-13%
-2%
-4%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%

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Analysis of the Cobb-Douglas functional
The unsuitability of the Cobb-Douglas function as a cost function is already known in
the literature. Bogetoft and Otto (2011) present the results of a benchmarking case
study of the energy sector in Germany. The authors were evaluating different
functional forms for both Stochastic Boundary (SFA) and DEA frontiers and concluded
that a Normed Linear function provided better results. The work also concludes that
the Cobb-Douglas function is not a cost function but rather a production function.
We could, of course, have handled this heteroscedasticity problem using a log-
linear specification, but we did not do so to avoid the specifications curvature
problem; the output-isoquants in a log-linear specification curve the opposite
way than do usual output-isoquants. This is not surprising since the log-linear
model corresponds to a Cobb-Douglas model, which is really a production
function and not a cost function (BOGETOFT e OTTO, 2011, p. 31).

Syrjanen, Bogetoft and Agrell (2006), pointed this problem in the report to the Finnish
Regulator[1]: "the CobbDouglas function is not a cost function". After concluding that
the linear function has heteroscedasticity problems that can be solved with the use of
a log-linear function (Cobb-Douglas), the authors argue that this has significant
conceptual problems suggesting not using it in the regulatory cost modeling for
Finnish distributors. Due to conceptual problems related to the log-linear model we
suggest discarding this model"(p. 50).
Figure 6 shows that although in the log scale, the Cobb-Douglas function seems to fit
properly the data (figure in the left side), in the original space it produces a curve
taking an opposite direction (blue curve) than what it should be expected as a cost
function (pink curve). Therefore, the Cobb-Douglas is not appropriate as a cost
function.

Figure 6 . Analysis of Log-linear function as a cost function
SYRJANEN, M., BOGETOFT, P., AGRELL, P. Efficiency benchmarking project B:
Analogous efficiency measurement model based on Stochastic Frontier Analysis,
Final Report, 2006.


Proceedings of the 10
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Furthermore, Cobb-Douglas function has an increasing marginal rate for the outputs
which contradicts economic theory. In fact, based on economin theory, production
functions are required to be convex.
The problem of the sample size
According to ANEEL, the COLS efficieny scores are calculated in three steps. In the
first step, the companies are grouped into two groups: Group A has 29 distribution
companies which presented a total electricity consumption larger (or equal) than 1
TWh in year 2003. Group B has 30 distribution companies which presented a total
electricity consumption smaller than 1 TWh in year 2003. In the second step, a
multiple regression model is fit separately to each group (A and B). The response, or
dependent variable, is the total operational cost of each company, for years 2003 to
2010. The predictors are: (1) total number of consumer units, (2) the total length of
the network, (3) total weighted consumption (for consumers of high, medium and low
voltage), for years 2003 to 2010. The model applies the logarithm (or log) scale which
adjusts the heteroscedasticity within each group. In the third step, for each group, the
estimated regression model is shifted towards the company with the smallest residual.
The efficiency scores are calculated with respect to this new shifted regression model.
In can be showed that the efficiency scores estimated using the model COLS Cobb-
Douglas are extremely sensitive to the sample size. The larger the sample size, the
smaller the efficiency scores of all companies, except the company which achieved
the smallest residual in each group. The company with the smallest residual has an
efficiency score of 1 (100%). By accounting the operational cost over a period of time,
say year 2003 to 2010, the sample size increases. Therefore, the larger the time period,
the larger is the sample size. In this case, there might exist temporal dependencies
which were not accounted in the Cobb-Douglas model. As a consequence of the
sample size, most of the efficiency scores were between 20% and 50% for most
companies. For instance: Boa Vista company (Group B) achieved an efficieny score of
19%, Joo Cesa company (Group B) achieved an efficiency score of 21% and Cemig
company (Group A) achieved and efficiency score of 39%. If those efficiency scores
were estimated for a single year, say 2010, most of the scores would be, on average,
close to 60%, which is incredible higher than current estimates. In brief, with the
increase of the sample sample, the scores are mostly between 20% and 50%, as can be
shown in Figure 7. Figure 7 shows that by shifting the regression model towards the
smallest residual, the larger the sample size the farther is the shift of the regression
model from the data and, as a consequence, the smaller are the estimated efficiency
scores. Therefore, the efficiency scores using the score COLS Cobb-Douglas are
inapropriate for benchmarking. This asymmetric distribution of the efficiency scores,
in the presence of a larger sample size, is known in the literature as the extreme value
distribution, and it is caused primarily by the minimal operator in the COLS procedure.

Proceedings of the 10
th
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Figure 7. Effect of the minimum operator on the distribution of independent and
identically distributed normal random variables.
Furthermore, by assuming some basic statistical assumptions on the distribution of the
residuals, the estimates of the regression model can be used to generate confidence
intervals for the efficiency scores. Table 1 shows the efficiency score of Cemig
company and its confidence intervals (lower and upper limits) using COLS Cobb-
Douglas model and the sample size adjustment. It worh mentioning that without the
sample size adjusment the efficiency score estimate is 39%.

Table 1: Confidence intervals for the efficiency score of Cemig using the
adjusted multiple regression model
Description Efficiency Score
Estimated Value 0.4519956
Lower Limit 0.3412855
Upper Limit 0.5986191


amostra de
tamanho n
Sample
size n

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Hypothesis testing of the correlation between DEA and COLS Cobb
Douglas efficiency scores for groups A and B
ANEEL reports that DEA-NDRS and COLS Cobb-Douglas efficiency scores have a
correlation coefficient of 0.94 (94%) (paragraph 68, PG. 13) and therefore, they are
similar.
Figure 8 shows the relationship between the estimated using DEA and COLS for
groups A and B. For Group A the linear correlation coefficient is 0.9539 (95.38%). For
Group B, the linear correlation coefficient is 0.8369 (83.69%). To test the hypothesis
that the DEA and COLS scores are statistically equivalent, it is possible to fit a simple
linear regression model with no intercept for each group of the form:

, and generate confidence intervals for the parameter . If the confidence


interval contains the unit value (=1 ) it is possible to conclude that there is statistical
evidence that DEA and scores are similar.

(a)

(b)
Figure 8. Scatter plots of DEA and COLS efficiency score for groups A and B.
Table 2 presents the estimated values for the parameter for groups A and B, and the
respective confidence intervals of 95% and 99%. The value =1 is not included in any
of the confidence intervals. From these results it can be concluded that the DEA
efficiency scores and COLS are not statistically similar. On average, for Group A, the
efciciency scores calculated by COLS is 10.33% smaller than DEA efficiency scores.
For Group B the efficiency scores calculated by COLS is, on average, 21.66% smaller
than those generated by DEA.

0.5 0.6 0.7 0.8 0.9 1.0
0
.
4
0
.
5
0
.
6
0
.
7
0
.
8
0
.
9
1
.
0
Grupo A
DEA
C
O
L
S
0.2 0.4 0.6 0.8 1.0
0
.
2
0
.
3
0
.
4
0
.
5
0
.
6
0
.
7
0
.
8
0
.
9
Grupo B
DEA
C
O
L
S

Proceedings of the 10
th
International Conference on DEA Brazil2012 132
Table 2: Hypothesis testing for the similarity between DEA and COLS
efficiency scores, for groups A and B.
Group A
Estimated value for
intercept:
0,89662
CI
95%
()
[0,8648902 a 0,9283498]
CI
99%
()
[0,8538171 a 0,9394229]
Group B
Estimated value for
intercept:
0,78342
CI
95%
()
[0,7280965 0,8387435]
CI
99%
()
[0,7088598 0,8579802]
Analisys of Outliers in Efficiency Scores estimated by COLS
Particularly, the UHENPAL company achieved in year 2004 an efficiency score of 100%
and, based on the current model (Technical Note 294/2011), this company is the
reference company for group B. Because of current efficiency score methodology,
after 2004, the efficiency scores of UHENPAL have gradually decreased reaching an
efficiency score of 45.79% in 2009. It is worth noting that an observation from 2004
still has a great impact on the scores estimates in five years later, as shown in Table 3.
In short, the UHENPAL 2004 results negatively impacts UHENPAL 2009 score because
of the current methodology.

Table 3: Analysis of the UHENPAL efficiency scores. The company achieved
100% efficiency score in 2004 but because of current methodology, most
recent efficiency scores have been compromised
Ano Efficiency score Operational Cost
2003 0.7953737 R$ 2.508.824
2004 1 R$ 2.050.212
2005 0.7477445 R$ 2.916.724
2006 0.7001319 R$ 3.163.022
2007 0.3701561 R$ 5.962.437
2008 0.3654717 R$ 6.182.374
2009 0.4579384 R$ 5.038.483

Proceedings of the 10
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Therefore, it can be concluded that the claim, presented by ANEEL (Technical Note
294/ 2011, p. 8), that the COLS methodology is robust to outliers is flawed. In fact,
COLS is highly sensitive to outliers .
It should be noted, also, that it was not found in the literature any regulator that
applies an average result of two different methodologies such as DEA and COLS. The
Austrian regulator, for example, uses a weighted average of DEA and MOLS, though
MOLS is a more flexible form of translog function. CEPA (2003) apud NERA (2003)
suggest a combined methodology of DEA and COLS in which DEA would be used to
calculate efficiency scores while COLS would evaluate the products chosen and the
significance of scores from DEA. The British regulator deploys COLS by applying the
model to the data of the last year of British companies (2009). Many models that use
more than a single methodology use the best (best-off) of the scores (Germany, for
example).
Problems related to the DEA model applied by ANEEL
In technical note No. 101/2011, ANEEL proposed a DEA model having one variable as
input (operational costs) and three outputs (consumer number, network length and
total consumption). The model adopted was DEA-NDRS.
To justify the use of NDRS, ANEEL relies on the theory of natural monopolies which
exists only for the sectors where economies of scale are not decreasing. Banker, in its
technical report submitted to the second stage of public auction 040, points the
inappropriateness of DEA model using NDRS for the calculation of operational costs:
The arguments presented in note 101/2011 from page 18 to page 20 are not
correct when translating the theoretical assumption of absence of scale
diseconomies in natural monopolies to the empirical estimation of a production
frontier to benchmark electricity distribution companies
Technical note 101/2011 makes an error in interpreting this assertion in my
earlier report about why we need to use a VRS model rather than a NDRS model.
This note seems to suggest that the use of the VRS model implies that the true
underlying production technology and the cost function exhibit decreasing
returns to scale. This interpretation is not correct, as noted in my last report, and
elaborated further in this report. We do not propose that the true cost function
has decreasing returns to scale. We assert that ANEELs proposed simplified
model distorts the true production relationship such that the NDRS assumption
valid for the true function cannot be sustained for estimating the simplified
production frontier. Even when the true cost function exhibits increasing returns
to scale, if the estimation model does not capture all the complexities of
interrelations between multiple inputs and multiple outputs, then the estimation
model based on VRS significantly outperforms in accuracy a corresponding
estimation model based on NDRS. (BANKER, 2011, p.2).
So, as stated by Banker(2011), for empirical analyses, the VRS model is the correct
model, even when economic theory argues that NDRS prevails in situations of natural
monopoly. This happens because an empirical model is only an abstraction of reality

Proceedings of the 10
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and, unless you have a complete specification of the production function between all
inputs, outputs and environmental variables, it is not appropriate to impose NDRS.
The regulator conducted statistical tests showing that the VRS model had the best fit to
the frontier calculated for the large companies group with data in cross section. This
result can be seen in Table 6 of the technical note No. 101/2011. The regulator
contradicts itself in the justification for the maintenance of the NDRS model because
states that the results are quite sensitive to the withdrawal of the two largest
companies in the sample. ANEEL still points to a serious problem of modeling: "the
problem may lie in the lack of a significant sample of larger companies, and not in a
characteristic of the activity distribution of electricity (ANEEL, 2011, p. 20).
The statistical tests for returns to scale pointed VRS in the case of large companies
probably due to the existence of the two companies with very distinctive size. In this
way, the model applied by ANEEL with few variables, is not sufficiently robust to
represent with the complexity of the selected sample, so that the test points to a better
fit with the VRS frontier. By the sensitivity of the test to the withdrawal of the two
largest companies in the sample, these companies are the most harmed by the
regulator model.
Still, the regulator argues that there were not appropriate justifications to explain the
presence of diseconomies of scale:
Thus, it lacked to contributions received in the public auctions 040/2010 the
theoretical reasons which would lead to diseconomies of scale. Furthermore, in
two past reviews cycles, in the reference company model for the distribution
activity, it was assumed that larger companies have lower costs with
administrative structure which would imply higher returns to scale. (ANEEL, 2011,
p. 20)
The rationale for the VRS model is not the presence of diseconomies of scale in the
distribution sector in Brazil, but the simplicity of the proposed model, which imposes
diseconomies of scale for some companies that, in the real theoretical frontier where
all variables are properly measured and considered, it would not present this feature.
So that the model penalizes these companies because it does not allow diseconomies
of scale in a simplified model that does not reflect correctly the reality.
Conclusions
The evaluation and implementation of benchmarking models are certainly a difficult
task, primarily due to the difficulty of getting the best data and then due to the wide
range of possibilities for methodologies and modeling. However, the available
techniques have been already applied for several years and the literature on the
subject is quite wide, having been already discussed the main problems and benefits
associated with each tool.
In order to determine the best method, it is important to consider the problem to be
solved, but it is also essential to avoid methodological problems that might disqualify
the results.
It is known that the goal of mathematical and statistical models is, through simplified
simulations, capture the most important aspects of reality. To consider all the variables

Proceedings of the 10
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International Conference on DEA Brazil2012 135
involved in any phenomenon is very difficult and often impossible. However, any
simplification cannot leave aside key variables.
The methodology presented by ANEEL demonstrates flaws that compromise the
results. The problems presented may be affecting negatively quite a few companies
and benefiting other precisely because they do not sufficiently reflect the reality. The
main methodological problems presented in this paper can be summarized in the
following items:
1. The use of the COLS associated with a Cobb-Douglas function, which is
inadequate for estimating cost functions;
2. The sample size issue related to the use of the COLS, which reduces efficiency
scores as it increases the sample size. This problem is further aggravated by the
impact of outliers in this method;
3. The use of NDRS in the DEA model in a highly simplified model.

The purpose of this paper was to demonstrate some problems of the model presented
by ANEEL. As demonstrated, the model should be improved, but, in addition, there
must be a more complete study to identify the main variables that explain the costs in
the electricity distribution service in Brazil.
Acknowledgments
This work was supported by Fundao de Amparo Pesquisa de Minas Gerais
FAPEMIG, Project PPM-00543-11 and Fundao de Amparo Pesquisa de Minas
Gerais FAPEMIG, Agncia Nacional de Energia Eltrica- ANEEL and Centrais Eltricas
de Minas Gerais CEMIG, Project SHA-APQ-03165-11.
References
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Scandinavian Electricity Distribution. Journal of Productivity Analysis, v.23, n.2, p. 173-
201, 2005.
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th
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nker_and_ana_lopes_report.pdf (accessed on April, 27, 2012), 2011.
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n.1, p. 1-18, 2008.


Proceedings of the 10
th
International Conference on DEA Brazil2012 137
18. Integration of BSC, DEA and
Game Theory in the
performance of public health
service
Marco Aurlio Reis dos Santos
Department of Production Engineering at Sao Paulo State University (UNESP),
marcoaurelioreis@yahoo.com.br
*

Fernando Augusto Silva Marins
Department of Production Engineering at Sao Paulo State University (UNESP),
fmarins@feg.unesp.br
Valerio A. P. Salomon
Department of Production Engineering at Sao Paulo State University (UNESP),
salomon@feg.unesp.br
Abstract
We evaluate the efficiency of the primary public health service in a typical Brazilian
medium size town. This paper describes an integration of Network DEA model, Nash
bargaining model, and BSC. The Network DEA allows establishing a hierarchical
structure that corresponds to the BSC perspectives by adopting a sequence of stages
where a set of indicators at one stage impacts in a subsequent stage. We used the
Nash bargaining model in order to negotiate the desired levels of input-output from
one stage to another. Public health services were compared as well as the
benchmarks were identified for the inefficient services.
Keywords: Network DEA, Game Theory, BSC, Bargaining Problem.
Introduction
Many researchers have focused attention on the measurement of efficiency in the
healthcare. According to Emrouznejad et al. (2008), the DEA (Data Envelopment
Analysis) has been applied in the evaluation of the health services performance with
good results. Various DEA approaches have been widely developed and applied in
both public and private sectors (HADAD et al., 2011).
Here, we evaluate the efficiency of the primary public health service in a typical
Brazilian medium size town, which has as the main challenge to find way to
efficiently achieve its goals.
Moreover, this paper describes a method that integrates Network DEA model (FRE
and GROSSKOPF, 2000), Nash bargaining model, and BSC - Balanced Scorecard

*
Corresponding author

Proceedings of the 10
th
International Conference on DEA Brazil2012 138
(Kaplan and Norton, 1992) with the intent of extending this analysis beyond only one
organizational perspective. The Network DEA allows establishing a hierarchical
structure that corresponds to the BSC perspectives by adopting a sequence of stages
where a set of indicators at one stage impacts in a subsequent stage. The DEA-BSC
model was proposed by Eilat et al. (2008), and extends the original CCR model and
quantifies some concepts that are embedded in BSC. Amado et al. (2012) proposed a
conceptual framework based on BSC and multistage DEA approach. However, it is
evident that there are conflicts among the objectives of each perspective. We used the
Nash bargaining model in order to negotiate the desired levels of input-output from
one stage to another.
Among specific objectives of this paper are the elaboration of a model of performance
evaluation by using DEA and Game theory under the guidance of a Strategic
Management System, as for instance, the application of the BSC framework, and
finally to test the applicability of proposed model in primary healthcare service by
comparing the similar aspects of healthcare services offered in different locations.
Method
With the help of the Health Department personnel of the studied city, were identified
which resources (inputs) and service levels (outputs) would be considered in the
modeling: the medical specialties (internal medicine, gynecology and pediatrics)
offered by a typical HBU (Health Basic Units) were defined as being the DMU. Also,
the DEA variables were designated for each BSC perspective customized for the
Health System: Patient Perspective; Internal Processes Perspective, Learning and
Growth Perspective; and Financial Perspective.
As the next step, a survey was planned and performed in each HBU to obtain data
information about the "Patient Perspective", "Learning and Growth Perspective" and
other organizational characteristics the DMU. The Key Performance Indicators
considered were: Financial Perspective - Number of physician, Number of
functionaries, and Expenses; Learning & Growth Perspective - Working conditions;
Internal Process Perspective - Medical service time (minutes), Wait time (minutes),
Percentage of available medications, and Capacity used; and Patient Perspective -
Percentage of patient satisfied.
Finally we developed three models in order to evaluate the performance in each
medical speciality. Each model was applied in three phases. Consider a three-stage
process shown in Figure 1. Suppose we have k DMU, and that each DMU has the
vector of inputs (that are indicators for the Financial Perspective) to the first stage and
the vector of outputs from this stage that are indicators for the Learning & Growth
Perspective. These outputs (Learning & Growth Perspective) then become the inputs
to the second stage. Indicators assigned to Internal Process Perspective denote the
vector of outputs from second stage; this vector (Internal Process Perspective)
becomes the vector of inputs to third stage. Finally, indicators assigned to Patient
Perspective denote the vector of outputs from the third stage.

Proceedings of the 10
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International Conference on DEA Brazil2012 139

Figure 1. BSC in three-stage process
Note that the vector of outputs and inputs in each stage can be regard as two
players in Nash bargaining theory. We briefly describe the game bargaining
approach (Nash, 1950).
Denote the set of all individuals players by N={1, 2, 3,, n}, and a payoff vector is
an element of the payoff space R
N
, which is the n-dimensional Euclidean space
indexes by the set of individual players. A feasible set S is a subset of the payoff
space, and a disagreement point d is an element of payoff space. A bargaining
problem can be defined as three vectors (N, S, d), which respectively consist in
individual players, a feasible set and a disagreement point. Nash (1950) required
that the feasible set is compact, convex, and contain some payoff vector that each
individuals payoff is at least greater than the individuals disagreement point. The
solution proposed by Nash is the maximization of (1):

=


n
i
i i
d u S u
d u
1
,
) ( max
,
, ,

(1)

The optimum value of function F(N, S, d) satisfy four properties: Pareto efficiency,
Invariance with respect to affine transformation, Independence of irrelevant
alternatives, and Symmetry.
In the first model (2), we used the Nash Bargaining problem in order to negotiate
the desired levels of input-output in each stage of Network DEA, as expressed
below. This model (2) is the first phase of our analysis.
3 2 1
max z z z + + . .t s (2.1)
1 1
1
1

P P
Y y
o
(2.2)
) ( ) 1 (
1 2 2
2
2

P P
Y y
o
(2.3)
) ( ) 1 (
2 3 3
3
3

P P
Y y
o
(2.4)
3 4 4

P P
X x
o
(2.5)
1 2 2 1 1
) )( ( z = (2.6)
2 3 3 2 2
) )( ( z = (2.7)
3 4 3 3
) )( ( z =
(2.8)
1 , 1 , 1
3 2 1
= = =
(2.9)
4 3 3 2 2 1 1
, , , (2.10)
. 0 , 0 , 0 , 0
3 2 1

(2.11)

Proceedings of the 10
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International Conference on DEA Brazil2012 140
In this model, P1 is the set of indicators assigned to Patient Perspective, P2 is the set
of indicators assigned to Internal Processes Perspective, P3 is the set of indicators
assigned to Learning & Growth Perspective, P4 is the set of indicators assigned to
Financial Perspective, y
o
is the vector of output generated by the DMU
o,
x
o
is the vector
of input used by the DMU
o
, Y is the vector of outputs generated by the set of DMU, X
is the vector of inputs used by the set of DMU, is the vector of intensities variables
for the set of DMU, is the scalar coefficient that promotes the maximum
equiproportional reduction of all inputs and } 3 , 2 , 1 { : = i
i
, are scalar coefficients that
promotes the maximum equiproportional increase all outputs. We add the convexity
constraints (2.9) for each stage in order to adopt the variable returns to scale
assumption. From the optimum solution obtained by the first model, we proposed
the second model in order to negotiate the desired levels of input-output from one
stage to another. This is the second phase of our analysis.


i i
i
i i
f


*
:
) ( ) ( max
. .t s
(3.1)

=

=
. , 1
), (
) (
*
4
*
4 4

if
if
f where
(3.2)
1 1
1
1

P P
Y y
o
(3.3)
) ( ) 1 (
1 2 2
2
2

P P
Y y
o
(3.4)
) ( ) 1 (
2 3 3
3
3

P P
Y y
o
(3.5)
3 4 4

P P
X x
o
(3.6)
1 , 1 , 1
3 2 1
= = =
(3.7)
4 3 3 2 2 1 1
, , , (3.8)
. 0 , 0 , 0 , 0
3 2 1

(3.9)
In this model,
*
and
*
i
is the value of optimum solution for the 1
st
model. Note
that if some
*
i
and some
*
do not satisfy
i i
>
*
and
i
<
*
, then the respective
output associate to
*
i
and, the input associate to
*
do not participate as a player in
model (3).
In the third phase, we used the model (4) in order to optimise
i
and that do not
participate as a player in second model (3), in order words, this model (4) optimise
the values of
*
i
and
*
if
i i
=
*
and
i
=
*
in the first model.
+ +
3 2 1
max
. .t s
(4.1)
1 1
1
1

P P
Y y
o
(4.2)
) ( ) 1 (
1 2 2
2
2

P P
Y y
o
(4.3)
) ( ) 1 (
2 3 3
3
3

P P
Y y
o
(4.4)

Proceedings of the 10
th
International Conference on DEA Brazil2012 141
3 4 4

P P
X x
o
(4.5)
1 , 1 , 1
3 2 1
= = =

(4.6)
* *
3 3
*
2 2
*
1 1
, , ,

(4.7)
. 0 , 0 , 0 , 0
3 2 1


(4.8)
In this model (4),
*
and
*
i
are the optimum solution for the 2
nd
model, but it does
not provide information on the efficiency of each individual stage. We calculated the
efficiency of each stage by the multiplier model (5).
. .
min
*
4
*
3 3
*
2 2
*
1 1
* *
3
*
2
3
3
2
2
t s d d d d
v u u y u y u
P
o
P
o
+
+ + + +

(5.1)
1
1
1
1
= d y u
P
o
, 1
2
2
2
= d y u
P
o

(5.2)
1
3
3
3
= d y u
P
o
, 1
4
4
d vx
P
o

(5.3)
0
*
2
2
2
1
1
u Y u Y u
P P

(5.4)
0
*
3
3
3
2
2
u Y u Y u
P P

(5.6)
0 , 0 , 0 , 0
3 2 1
v u u u (5.7)
0 , 0 , 0 , 0
4 3 2 1
d d d d (5.9)
This last model is the dual to the model (4). According to Cook et al. (2010), due to
the usual procedure of adjusting the virtual inputs or virtual outputs by the efficiency
scores obtained from model (5), the model (4) does not necessarily supply
information about frontier projection for intermediate outputs. Thus, we considered
max{y
o
P2
u
2
; y
o
P2
u
*
} and max{y
o
P3
u
3
; y
o
P3
u
*
} as targets for intermediate outputs. We
calculated the efficiency for each stage according to:
*
2
2
2
1
1
3
u y u
y u
e
P
o
P
o
+
= stage 3 (5.1)
*
3
3
3
2
2
2
u y u
y u
e
P
o
P
o
+
= stage 2 (5.2)
* 4
3
3
1
v vx
y u
e
P
o
P
o
+
= stage 1 (5.3)
According to Cook et al. (2010) and Chen et al. (2009), because of extra free-in-sign
variable in the VRS-DEA model becomes difficult the use of geometric mean of the
efficiency scores of the three individual stages (KAO and HWANG, 2008), once the
geometric efficiency decomposition of the overall efficiency is restricted to CRS
situations. Thus, we adopted Additive efficiency decomposition (arithmetic mean)
approach (CHEN et al. 2009).


Proceedings of the 10
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Results and discussions
The models were run in the software GAMS (General Algebraic Modeling System),
and Excel 2010, using a notebook with processor Intel Core i5-2410M, CPU with
2.30 GHz, and 6.00 GB RAM. The studied city had five HBU, and they will just be
referred as HBU A, B, C, D and E. The
Table 6 presented the obtained data.

Table 6.The data of medical specialities for five Health Basic Units

In our preliminary study, we considered as disagreement point 1 =
i
, for i={1, 2, 3, 4},
thus it is possible guarantee that S was a feasible set. We obtained the efficiency
scores (Table 2) for each stage by equations from (5.1) to (5.3).






DMU Satisfaction Medical service time Wait time Medicine Available Capacity used
A-Internal medicine 86.22% 6.1 77.8 61.83% 81.25%
A-Pediatrics 95.14% 7.8 116.5 84.38% 81.25%
A-gynecology 77.38% 9.4 106.3 53.27% 64.58%
B-Internal medicine 74.13% 5.3 108.6 44.94% 65.25%
C-Pediatrics 58.87% 7.7 268.0 82.59% 68.75%
D-Internal medicine 80.38% 7.7 75.6 100.00% 68.75%
E-Internal Medicine 67.46% 14.2 171.2 62.92% 62.50%
E-Pediatrics 46.41% 15.2 96.8 54.64% 56.25%
E-Ginecology 80.02% 21.5 66.3 100.00% 25.00%
DMU Working conditions Physicians Functionaries Expenses
A-Internal medicine 68.57% 6 40 R$ 1240.18
A-Pediatrics 68.57% 2 40 R$ 1132.34
A-gynecology 68.57% 4 40 R$ 1186.26
B-Internal medicine 23.18% 4 13 R$ 929.76
C-Pediatrics 25.70% 2 12 R$ 513.17
D-Internal medicine 14.39% 4 15 R$ 1688.13
E-Internal Medicine 27.29% 2 16 R$ 588.04
E-Pediatrics 27.29% 2 16 R$ 588.04
E-Ginecology 27.29% 3 16 R$ 620.71

Proceedings of the 10
th
International Conference on DEA Brazil2012 143

Table 7. Efficiency scores for each stage.


Table 8 presents the value of scalar coefficients corresponded to the perspectives of
BSC. Note that, although the DMU B-Internal medicine was considered efficient at
third stage, according to
Table 7, the proposed model can identify an improvement opportunity.
Table 4 shows the targets for medical specialties.
Table 8. The value of scalar coefficients



DMU Stage 3 Stage2 Stage1 Overall (arithmetic mean)
A-Internal medicine 0.9487 0.6863 0.9018 0.8456
A-Pediatrics 1 1 1 1
A-gynecology 0.9183 0.6359 0.9484 0.8342
B-Internal medicine 1 0.6633 0.8432 0.8355
C-Pediatrics 0.7033 0.7628 1 0.8220
D-Internal medicine 0.9621 1 0.4749 0.8123
E-Internal Medicine 0.7094 1 0.8837 0.8644
E-Pediatrics 0.5043 0.9675 0.8837 0.7851
E-Ginecology 1 0.6590 0.8234 0.8275
DMU Beta 1 Beta 2 Beta 3 Alpha
A-Internal medicine 1 1 1.4277 0.6584
A-Pediatrics 1 1 1 1
A-gynecology 1 1.1115 1.3968 0.6687
B-Internal medicine 1.0085 1.1199 1.4882 0.9231
C-Pediatrics 1.4192 1 1.4402 1
D-Internal medicine 1 1.0383 1.7864 0.8000
E-Internal Medicine 1.1129 1.1284 1.4557 1
E-Pediatrics 1.6140 1.1278 1.4812 1
E-Ginecology 1 1.0446 1.4146 0.8268

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Table 9. Targets for medical specialities.


The dual values of
k
that represents the weights for a linear combination (virtual
DMU that is a benchmark) of medical specialties that are considered efficient. Making
an analogy with the BSC theory, it would be interesting to establish objectives,
measures and targets for the medical specialties, as well to develop the Strategic Map.
The BSC allows the identification of good initiatives, which should be adopted by the
inefficient DMU, based on implemented actions by a DMU that is a benchmark.
Table 10. Benchmarks for each medical specialty.



DMU Satisfaction Medical service time Wait time Medicine Available Capacity used
A-Internal medicine 86.22% 9.2 77.8 91.42% 81.25%
A-Pediatrics 95.14% 7.8 116.5 84.38% 81.25%
A-gynecology 77.38% 10.4 89.1 89.94% 71.78%
B-Internal medicine 74.76% 7.7 75.6 100.00% 73.08%
C-Pediatrics 83.55% 7.7 75.6 100.00% 68.75%
D-Internal medicine 80.38% 8.0 72.8 103.83% 71.39%
E-Internal Medicine 75.08% 16.1 91.7 88.33% 70.53%
E-Pediatrics 74.91% 17.2 85.8 90.33% 67.12%
E-Ginecology 80.02% 22.5 63.4 104.46% 68.75%
DMU Working conditions Physicians Functionaries Expenses
A-Internal medicine 97.90% 2 25 R$ 816.53
A-Pediatrics 68.57% 2 40 R$ 1132.34
A-gynecology 95.77% 2 24 R$ 793.29
B-Internal medicine 34.49% 2 12 R$ 513.17
C-Pediatrics 37.02% 2 12 R$ 513.17
D-Internal medicine 25.70% 2 12 R$ 513.17
E-Internal Medicine 39.73% 2 15 R$ 588.04
E-Pediatrics 40.43% 2 15 R$ 588.04
E-Ginecology 38.61% 2 12 R$ 513.17
Stage 1 A-Pediatrics C-Pediatrics
A-Internal medicine 49.0% 51.0%
A-Pediatrics 100.0% 0%
A-gynecology 45.2% 54.8%
B-Internal medicine 0% 100.0%
C-Pediatrics 0% 100.0%
D-Internal medicine 0% 100.0%
E-Internal Medicine 12.1% 87.9%
E-Pediatrics 12.1% 87.9%
E-Ginecology 0% 100.0%
Benchmarks

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Conclusions
This research demonstrated how is possible the use of the DEA to measure (and to
rank) the relative efficiency of the medical specialties offered by Health Basic Units
(HBU) in a medium size town of Brazil. The ranking of efficiencies provides important
information to the Health Secretary decides regarding actions to distribute better the
available resources, making more efficient the HBU, therefore improving the overall
performance of the Health System as a whole.
Regarding the set of medical specialties analyzed, it should be noted that the results
obtained are based on selected inputs and outputs and their priorities. Sometimes, the
targets proposed by the DEA technique cannot be applied in practice or they are very
difficult of achieve them, and, in these cases, managers ought to take them as a
reference. Each medical specialty must be analyzed according to its reality or
organizational context; therefore, even those, which achieved 100% of relative
efficiency, sometimes do not have the performance desired by the organization.
This occurs because the efficiencys concept represents the best relation between the
benefits obtained and the available resource used, but does not means these benefits
are the desired results.
References
Amado C.A.F., Santos S. P., Marques P.M. (2012) Integrating the Data Envelopment
Analysis and the Balanced Scorecard approaches for enhanced performance
assessment, Omega (40): 390-403.
Chen Y, et al. (2009) Additive efficiency decomposition in two-stage DEA, European
Journal of Operational Research (196): 1170-1176.





Stage 2 A-Pediatrics D-Internal medicine E-Internal Medicine
A-Internal medicine 0 76.9% 23.1%
A-Pediatrics 100.0% 0% 0%
A-gynecology 0% 72.9% 27.1%
B-Internal medicine 0% 100.0% 0%
C-Pediatrics 0% 100.0% 0%
D-Internal medicine 0% 100.0% 0%
E-Internal Medicine 0% 68.5% 31.5%
E-Pediatrics 0% 73.9% 26.1%
E-Ginecology 0% 100.0% 0%
Stage 3 A-Pediatrics B-Internal medicine E-Ginecology
A-Internal medicine 53.1% 30.9% 16.0%
A-Pediatrics 100.0% 0% 0%
A-gynecology 10.6% 71.8% 17.6%
B-Internal medicine 0% 89.3% 10.7%
C-Pediatrics 42.5% 49.3% 8.2%
D-Internal medicine 27.3% 64.0% 8.7%
E-Internal Medicine 0% 83.9% 16.1%
E-Pediatrics 0% 86.8% 13.2%
E-Ginecology 26.7% 68.6% 4.7%

Proceedings of the 10
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International Conference on DEA Brazil2012 146
Cook, et al. (2010) Measuring performance of two-stage network structures by DEA: A
review and future perspective, Omega: The International Journal of Management
Science (38): 423-430.
Eilat H. et al. (2008) R&D project evaluation: An integrated DEA and balanced
scorecard approach. Omega (36): 895-912.
Emrouznejad A. et al. (2008) Evaluation of research in efficiency and productivity: A
survey and analysis of the first 30 years of scholarly literature in DEA, Socio-Economic
Planning Science (42): 151-157.
Fre R., Grosskopf S. (2000) Network DEA, Socio-Economic Planning Sciences (34):
35-49.
Hadad S. et al. (2011) Determinants of healthcare systems efficiency in OECD
countries, The European Journal of Health Economics 2011; DOI 10.1007/s10198-011-
0366-3.
Kao C., Hwang S-N. (2008) Efficiency decomposition in two-stage data envelopment
analysis: An application to non-life insurance companies in Taiwan, European Journal
of Operational Research (185): 418-429.
Kaplan R.S., Norton D.P. (1992) The Balanced Scorecard: measures that drive
performance, Harvard Business Review (70): 71-79.
Nash, J. F. (1950) The bargaining problem, Econometrica (18): 155-16.


Proceedings of the 10
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19. Iteratively Weighted Least
Squares in Stochastic Frontier
Estimation Applied to the Dutch
Hospital Industry
Jos L. T. Blank
Delft University of Technology, Netherlands, j.l.t.blank@tudelft.nl
Aljar J. Meesters
University of Groningen, Netherlands, A.J.Meesters@rug.nl
Abstract
This paper proposes an alternative class of stochastic frontier estimators. Instead of
making distributional assumptions on the error and efficiency component in the
econometric specification of a cost function model (or any other model), this class is
based on the idea that some observations contain more information about the true
frontier than others. If an observation is likely to contain much information, it will get
a large weight in the regression analysis. In order to establish the weights, we
propose an iterative procedure. In each step weights can be determined by the
residuals obtained earlier and a user-specified weighting function. In each step the
weights will be updated and a next stage WLS regression will be carried out.
The advantages of this approach are its high transparency, the easy application to a
full-specified model and its flexibility. It allows to directly observing which
observations determine the frontier for a large part. The easy expansion to a full-
specified model refers to a model that includes a cost function and its corresponding
share equations. Its flexibility refers to the use of several alternative weighting
functions and the easiness of testing for the sensitivity of the outcomes.
The model has been applied to a set of Dutch hospital data. The outcomes of this
application are promising. The model converges rather quickly and presents reliable
estimates for the parameters, the cost efficiencies and the error components.
Key words: weighted least squares. SFA, hospitals
Introduction
The methodology Stochastic Frontier Analysis (SFA), suggested by Aigner, Lovell and
Schmidt (1977) and Meeusen and Van den Broek (1977), has become a standard in
econometric estimation of production and cost (or any other value) function. It is
based on the idea that empirically, production (or cost) can be described as a function
of a number of inputs (or outputs and input prices), a stochastic term, reflecting
errors, and another stochastic term, reflecting efficiency. With maximum likelihood
techniques, the parameters of the function and the parameters of the distribution of

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the stochastic components can be estimated. For extensive discussions on this
technique, see e.g. Kumbakhar & Lovell (2000) and Fried, Lovell & Schmidt(2008).
Since the 1977 publications, SFA has become very popular and has been applied in
many empirical work (for extensive literature reviews, see also Fried, Lovell and
Schmidt (2008) and Blank (2000)). Nevertheless, the approach has also widely been
criticized. The criticisms focus on two major points. The first type of criticism debates
the a priori specification of the production (or cost) function, the second type
concerns the assumptions on the distribution of the stochastic terms. Although both
criticisms can, to a certain extent, be overcome, by using flexible forms and using
different assumptions on the distribution of the stochastic variables in the analysis, the
rigidity might be seen as a problem. Although not mentioned very often, there is a
third type of criticism, which can be considered to be of a conceptual nature. In a
rather complex econometric framework, the methodology suggests to observe an
unobservable (the efficiency), which can be distracted from another unobservable (the
measurement and specification error). Those, who try to explain this approach to non-
initiated persons, such as managers and policy makers, will be confronted with
scepticism and unbelief. A technique like Data Envelopment Analysis, which is
actually seeking for observations that form the envelope, is far more appealing and
more transparent. This explains that in real-life problems, DEA has become a very
popular tool in applied work. Another conceptual framing of SFA may tackle the
problem and make the technique more accessible for non-experts.
The original work of Aigner, Lovell and Schmidt (1977) derives the stochastic frontier
approach in case of a single equation model. In a single equation model, we can only
estimate the technical or cost efficiency. If we are not only interested in technical or
cost efficiencies, but also in allocative efficiencies, a multiple equations approach,
allowing to derive the under- or overutilization of inputs, is needed. However, the
estimation of a multiple equations model, with a far going decomposition of the
underlying stochastic variables for measurement errors, technical and allocative
efficiency, is very troublesome. In particular, the theoretical linkage between the cost
function and the input demand equations is extremely difficult to handle (the so-called
Greene problem). Although some interesting solutions have been proposed by
applying shadow cost models (see Blank, 2009; Kumbhakar, 1997) or using Bayesian
estimation techniques, new estimation problems occur. Obviously, these approaches
suffer even more from a lack of transparency.
An alternative for the original SFA approach is the thick frontier analysis (TFA),
developed by Berger & Humphrey (1991). This approach allows to estimate a single
equation or a multiple equation. The technique is based on the selection of firms in
the top 10% (or any other percentage) and the bottom 10%. For both subsamples, the
production (or cost) function is estimated separately. Consequently, cost efficiencies
are derived by taking the ratio of the average cost of the worst practice firms and the
best practice firms. TFA has a number of advantages. Seemingly Unrelated Regression
allows for a straightforward estimate of a system of a cost function and the
corresponding share equations. TFA doesnt require any rigid assumptions on the
distributions of the error components and it does not suffer from the Greene problem.
Conceptually, it is a very transparent and appealing approach. On the other hand, it

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also has some serious drawbacks. It does not provide firm-specific cost efficiencies,
but only rather general efficiency scores. From an econometric point of view, there is
a loss of information, due to the discard of a large subset of observations. It is
questionable whether the researcher has the luxury of losing so many degrees of
freedom.
Estimating a production, cost, or profit frontier (hereinafter: frontier) would become
trivial if all firms would operate with full efficiency. One could use ordinary least
squares to estimate the parameters of the model. However, in reality some firms are
inefficient, which makes the estimation of the frontier a challenging task. This problem
could be solved by only taking account of efficient firms for the estimation of the
frontier, and by neglecting all inefficient firms. However, this method implies the
requirement of a priori knowledge about whether or not a firm is efficient and
obviously, knowledge about the efficient firms is, in general, not available prior to the
estimation of a production frontier and therefore, other methods for addressing this
problem have been proposed.
One method that is often used for estimating a frontier is the aforementioned
stochastic frontier analysis (SFA). In this approach, a stochastic term is added to an
OLS equation, where it is assumed that it follows a distribution with a non-negative
support. This stochastic term is supposed to pick up the inefficiency for each firm.
Although SFA includes the concept of inefficiency while estimating frontiers, it does
have its shortcomings. Firstly, it is often being criticized for its distributional
assumption for the efficiency component (see e.g. Ondrich & Ruggiero, 2001).
Secondly, although SFA allows for the estimate of cost functions, the concept of cost
efficiency doesnt seem to fit in with this type of estimation. Cost efficiency is built on
technical and allocative efficiency, and yet, under the SFA specification of a cost
function, all firms should be completely allocatively efficient (Greene, 1980).
Another approach for estimating a frontier was provided by Wagenvoort and Schure
(2006). They show the way in which efficient firms can be identified, if panel data are
available. They use a recursive procedure, by dropping the most inefficient firm at
each iteration. In each step, the firm-specific efficiency is calculated by averaging the
residuals of a firm over the whole time period. Their final step consists of using the
fully efficient firms for estimating the frontier. Our approach is similar to this idea;
however, we argue that the fact whether or not a firm is fully efficient doesnt concern
a zero-one-probability. We show the way in which a weighting scheme can be
implemented, in order to determine which firms are likely to be efficient and which
firms are likely to be inefficient. This concept also translates to a cross-section setting
so as to avoid the necessity of panel data. This also implies that we dont need to
assume that inefficiency is time-invariant, which can also be regarded as a rather
restrictive assumption in many efficiency models that are based on panel data.
In this paper, we propose an alternative that is related to the concept of stochastic
frontier analysis, while being far more appealing conceptually. As in TFA, it can also
be applied to multiple equation systems, while avoiding the Greene problem. Our
alternative incorporates information from all the data available. It allows decomposing
cost efficiency into technical and allocative efficiency without any additional
distributional assumptions. The method is based on an Iterative Weighted Least

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Squares (IWLS) method and can easily be programmed in standard econometric
software.
The outline of the paper is as follows. In Section 2, we discuss a few conceptual
issues of our method. In Section 3, we introduce a formal description of the model
and the estimation procedure. In Section 4, we apply the method to a set of Dutch
hospital data. Section 5 concludes the paper.
Methods
We start from the cost function, although the method may be applied to any other
model (see e.g. Fre & Primont, 1995). We assume that the firm is cost-minimizing and
that the total cost can be represented by a cost function c(y,w) that meets all the
requirements it entails. Input demand equations x
n
(y,w) can be derived from the cost
function, by applying Shephards Lemma. For reasons of convenience, we rewrite the
cost equations and input demand equations in terms of logarithms and cost shares,
and add an error term.
ln() = (ln() , ln()) +
0
(1)

(ln() , ln()) +

(2)

With:
C = total costs;
y = vector of outputs;
w = vector of input prices;
S
n
= optimal cost share for input n (n = 1,.., N).

0
,
n
error terms
Equations (1) and (2) can be estimated by a certain minimum distance estimator or, if
one wants to check for heterogeneity, with fixed or random effects, which will result
in consistent estimates of the parameters if [|, ] = 0. However, if some firms are
inefficient, i.e. they have a higher cost than what can be explained, the cost function
or random noise [] > 0, causing biases in the parameters of Equations (1) and (2).
Our suggestion for reducing these biases consists of estimating Equations (1) and (2)
with weighted least squares and assigning the ill-behaving observations with a low
weight, while the well-behaving observations will be assigned with a high weight.
Weighted least squares (WLS), which is also referred to as generalized least squares
(GLS), is a widely used econometric technique; however, since the weights are
generally not observable, they have to be estimated (see e.g. Verbeek, 2012). Our
proposed weighting scheme is based on the residuals obtained after Equations (1) and
(2) have been estimated with LSQ
3
, as we know that firms that are highly inefficient,
and thus likely to bias the results, will have a large residual , where is the estimate
of .

3
If Equation (1) and (2) are estimated with fixed effects, the weights can also be based on the fixed
effects, which would make our estimator to a generalized version of the estimator, suggested by
Wagenvoort and Schure (2006).

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Obviously, the way in which should be transformed into weights is as debatable as
the distributional assumption for the efficiency component in SFA. The weighting
scheme should reflect the tradeoff between noise and inefficiency. If one expects all
firms to be efficient, the deviation from the frontier, captured by, ismostly determined
by noise. If a weighting scheme, reducing the weight rapidly if is increasing, is being
used, the assessment of the level of the frontier will prove to be overly optimistic,
since firms that perform very well due to luck will get a larger weight. On the other
hand, if many firms are inefficient, while a weighting scheme that is virtually flat for
all is being used, the estimation of the frontier will prove to be too low, since firms
that effectively are very inefficient will still be considered to be quite efficient. One
way to determine the amount of noise versus inefficiency is to examine the skewness
of the LSQ residuals. It is easy to implement other weighting schemes and see if the
results differ. This is another advantage of our approach over the SFA approach,
which requires to calculate the convolution of two random variables and to derive the
maximum likelihood, if one wants to use another distribution.
Since the weighting scheme depends on ,which can be updated after the second
step, an iterative reweighted least squares procedure can be implemented. This
procedure is used for some robust regression estimators, such as the Huber W
estimator (Guitton, 2000). This similarity is no coincidence, since our suggested
estimator can also be considered as a robust type of regression. This implies that, after
each WLS estimation, new s are calculated, which are then used to generate new
weights, which, on their turn, are used in a next stage WLS estimation, until the
convergence criterion upholds. The convergence criterion we use requires that the
parameter estimates dont differ more than one percent from the previous stage.
Normally, we also want to know the levels of inefficiency and not only the parameters
of the cost function. In our suggested model, it is not obvious how these levels can be
calculated since, for the calculation of E[|], where is the level of efficiency, we
need at least the probability density distributions of and . However, our estimator
doesnt require making an assumption for the distribution of . This doesnt mean that
we are not able to say something about the efficiency of each firm.
Ondrich and Ruggiero (2001), for instance, show that, if a normal distribution is
assumed for the noise, the ranking of is equal to the ranking of and therefore, our
model enables us to specify the efficiency ranking for each firm.
Although the distributional assumptions about the efficiency term are not necessary
for the estimation, we still might use them for deriving the efficiency scores.
Therefore, we introduce the two usual unobservables u and v, representing the (in)
efficiency and the error term, respectively. We simplify the original problem of Aigner
et al. (1977), by only estimating the distribution of the error term, instead of both
components simultaneously. Since we did identify the cost frontier, we are able to
select a subsample of observations that satisfy u = 0, i.e. all observations with
observed cost lower than or equal to frontier cost (v 0). Note that we are not able to
identify observations that satisfy u = 0 and v 0, i.e. efficient firms with observed cost
greater than frontier cost. Therefore, we assume that |v| in the subsample is
distributed as
+
(0,

2
). The variance

2
can now be estimated by the sum of

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squared residuals, divided by the number of observations in the subsample (denoted
as

2
). Furthermore, in the full sample, we assume that the subsample is
representative with respect to the variance of the random errors and that random
errors are distributed as (0,

2
). Since we now have an estimate for the variance of
the random errors, we are also able to conditionally derive the expected efficiency
from the residuals, by applying, for instance, Materovs formula:
(

) =

2
if

0; = 0 otherwise (3)
with:

2
=

2

The efficiency score then equals:

= exp ( (

) (4)
Obviously, there are other alternatives available (see e.g. Kumbakhar & Lovell, 2000).
Note that, in comparison with the original Jondrow et al. (1982) paper, in the model,
we have swapped the roles of the random error and efficiency components. It is
important to stress that we dont apply the distributional assumptions to the errors and
efficiency components in the estimation procedure, but only in the derivation of the
efficiency scores. However, this procedure has some consequences for the weighting
scheme in the estimation procedure. Since we assume that all negative residuals
indicate efficient firms and that the residuals only reflect random noise, there is no
reason for assigning different weights to these observations; therefore, for reasons of
consistency, we use a weighting scheme that assigns a weight equaling 1 to all the
observations in the efficient subset.
Results and discussions
Model specification
We apply the well-known translog cost function model (Christensen et al., 1973;
Christensen & Greene, 1976). The cost function model consists of a translog cost
function and the corresponding cost share equations. The model includes first and
second order terms, as well as cross-terms between outputs and input prices, on the
one hand, and a time trend, on the other hand. These cross-terms with a time trend
represent the possible different natures of technical change. Cross-terms with outputs
refer to output-biased technical change and cross-terms with input prices refer to
input-biased technical change.


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( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( ) + +
+ + +
+ + +
+ + + + + =




= =
= = = =
= = = = = =
= = = = =
N
n
n i
M
m
m i
O
o
M
m
m o ij
O
o
N
n
n o on
N
n
N
n
M
m
N
n
n m mn
O O
o
o o oo n n nn
M
m
M
m
m m mm
O
o
o o
N
n
n n
M
m
m m
W T j Y T i
T h Y Z g W Z f
W Y e Z Z d W W c
Y Y b Z d W c Y b a C
1
1
1
1
0
1 1 1 1
1 1 ' 1 1 1 0 ' 1 '
' ' '
1 1 '
' '
1 1 1
0
ln ln
ln ln
2
1
ln ln
ln ln ln ln
2
1
ln ln
2
1
ln ln
2
1
ln ln ln ln
(1)
With:
C = total costs;
Y
m
= output m (m = 1,.., M);
T = year of observation;
W
n
= price of input n (n = 1,.., N);
Z
o
= fixed input o (o = 1,.., O).
n m om on mn oo nn mm o n m o
j i h g f e d c b d c b a
1 1 0 ' ' '
, , , , , , , , , , , ,
parameters to be estimated.
By applying Shephards Lemma, we see that the optimal cost share functions can be
presented as:
( ) ( ) ( )

= = =
= + + + + =
N
n
M
m
O
o
in o on m mn n nn n n
N n T j Z f Y e W c c S
1 ' 1 1
'
) ,.., 1 ( ln ln ln
(2)
With:
S
n
= optimal cost share for input n (n = 1,.., N)
Homogeneity of degree one in prices and symmetry is imposed by applying
constraints to some of the parameters to be estimated. In formula:
o o oo n n nn m m mm
d d c c b b
' ' ' ' ' '
; ; = = =


= = = = =
= = = = =
N
n
n
O
o
on
N
n
mn
N
n
nn
N
n
n
j k f m e n c c
1
1
1 1 1
'
1
0 ; ) ( 0 ); ( 0 ); ' ( 0 ; 1
(3)
Equations (1) and (2) can be estimated by OLS or if one wants to control for
heterogeneity, with fixed or random effects, which will result in consistent estimates of
the parameters if [|, ] = 0. Yet, if some firms are inefficient, i.e. they have higher
cost than what can be explained, the cost function or random noise [] > 0, causing
a bias in
0
. Moreover, if the input mix of a firm is partly determined by the firms
expectations of its efficiency level we even have [|, ] where is a constant.
This causes biases, also in the other parameters of Equations (1) and (2).
Data
The data for this study cover the period 2003-2009 and were obtained from the Dutch
Hospitals Association. Annual financial, patient and personnel data were collected by
means of surveys. The surveys cover all the general hospitals in the Netherlands. For

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the purpose of this study, the data were checked for missing or unreliable data.
Various consistency checks were performed on the data, in order to ensure that
changes in average values and in the distribution of values across time were not
excessive. In particular, observations with unit value (for instance the personnel costs
per FTE for each type of personnel) less than 0.5 times or exceeding 2 times the
median value were identified. After the elimination of observations, whose dataset
contained inaccurate or missing values, we obtained an unbalanced panel dataset of
406 observations over the 5 years of study. There are approximately 80 observations
for each year. The year 2005 has the highest coverage with 84 observations out of 89,
2007 has the lowest coverage with 75 observations out of 86.
The main service delivery of hospitals consists of the treatment of patients. Therefore,
the output of hospitals is measured by the number of discharges, including day-care
patients and outpatients (not followed by an admission). The discharges have been
divided into over 30 medical specialties, in order to measure case-mix. Since it is not
possible to use such a large number of categories, they have been aggregated into
three categories, on the basis of average stay homogeneity and the distinction
between surgery/non-surgery specialties. Therefore, we distinguish the following three
groups of specialties:
Surgery and Non-surgery with average stay less than 4 days;
Non-surgery with average stay more than 4 days;
Surgery with average stay more than 4 days.
This results in four types of output, three types of inpatients (including day-care
patients) and outpatients. Although these four types of production explain a very large
part as well see later of variations in cost, the services are much more nuanced
than just the number of outpatients and discharges. The health outcome of patients
seems to be a particularly important component of hospital production. Nevertheless,
it seems reasonable to assume that the quality has not decreased, as it is constantly
monitored, for instance, by the health inspectorate, patient associations and media,
and subjected to quality-improving interventions by physicians and hospital
management. Therefore, the estimates of productivity change can be regarded as a
lower bound.
Resources include staff, administrative and maintenance personnel (including security
and cleaning), nursing personnel, paramedical personnel (such as lab technicians),
material supplies, maintenance and capital. Physicians are not included in these
personnel variables, in order to ensure that hospitals with hospital-employed
physicians and hospitals with self-employed physicians are treated equally. The costs
of physicians (wages) are not included in the cost or price variables either.
Material supplies include items such as medical supplies, food and general cost.
Maintenance includes energy costs, costs related to grounds and buildings. The
maintenance costs are rather low and have, for reasons of simplicity, been added to
the material supplies. Personnel and material supplies are treated as variable
resources, since the hospital can change these in the short term.
Capital refers to capital assets, such as buildings and medical equipment. The volume
of the capital is measured as a weighted aggregate of beds, intensive care beds,

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psychiatric beds, square meters and number of radiotherapists (a proxy for the
number of linear accelerators and cobalt units).
There are data on the costs and the quantity for each resource personnel category. For
each region and time period, wages are defined as the average wage per full time
equivalent. This is considered to be the market price for labour; qualitative differences
between hospitals are included in the volume of labour.
Since for material supplies, there is no natural unit of measurement, they are
presented by means of a circumventing concept. The price of material supplies is a
weighted index, based on components of the consumer index, calculated for the
Netherlands by Statistics Netherlands. The weights are derived from cost shares.
The price of capital is defined as a unit value, derived from capital costs and the
aforementioned volume of capital.
Estimation results
The models are estimated as multivariate regression systems with various equations
with a joint density, which we assume to be a normal distribution. Because
disturbances are likely to be cross-equation-correlated, Zellners Seemingly Unrelated
Regression method is being used for estimation (Zellner, 1962). As usual, as the shares
add up to one, causing the variancecovariance matrix of the error terms to be
singular, one share equation in the direct cost function model is eliminated. Since we
are dealing with a relatively large number of cross-sectional units and a limited
number of periods, we ignore the fact that we are dealing with a panel data (with
respect to intra-firm correlations). It is obvious that the between variance is far more
important than the within variance.
In our analysis, we use the following weighting scheme:
=
1
1+

if > 0, else = 1 (4)


With:

= the standard deviation of the LSQ residuals.


An interesting aspect of this weighting scheme is that the weights are directly related
to the efficiency scores. Efficient firms have weights equal to 1 and inefficient firms
have efficiency scores equaling the weights multiplied by a constant (equal to the ratio
of variances).
However, it is easy to implement other weighting schemes and see if the results differ.
This is another advantage of our approach over the SFA approach, which requires to
calculate the convolution of two random variables and to derive the maximum
likelihood, if one wants to use another distribution. As it turns out, our results were
quite robust for another weighting scheme, based on rank numbers. In case of IWLS
estimation, the procedure will stop if the maximum change in the parameters is less
than 1%. The number of iterations in our application equals 12. Besides the imposed

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theoretical requirements, there are a few others requirements that also have to be
fulfilled, such as monotonicity and concavity in resource prices (Fre & Primont,
1995). These requirements can be tested posteriorly. An estimated cost function is
monotonic in resource prices, if the fitted cost shares are positive. A necessary
condition for concavity of the cost function is that the own partial elasticities of
substitution are less than zero for all resources; a sufficient condition is that the matrix
of partial elasticities of substitution is negative semi-definite. The matrix is negative
semi-definite if all eigenvalues are less than or equal to zero. These requirements are
tested for the average firm.
Figure 2 Estimates frontier cost function by SUR and IWLS
Variable Parameter Esti-
mate
St. Error T-value Esti-mate St. Error T-value
LSQ-estimates IWLS-estimates
Constant A0 0.150 0.022 6.849 0.070 0.017 4.208
Year=2004 A2 -0.050 0.010 -4.901 -0.043 0.008 -5.392
Year=2005 A3 -0.081 0.012 -7.003 -0.069 0.009 -7.871
Year=2006 A4 -0.112 0.013 -8.506 -0.094 0.010 -9.350
Year=2007 A5 -0.142 0.015 -9.373 -0.122 0.012 -10.520
Year=2008 A6 -0.162 0.016 -9.833 -0.137 0.012 -11.064
Year=2009 A7 -0.186 0.018 -10.260 -0.165 0.014 -11.547
Discharges 1 B1 0.228 0.044 5.216 0.187 0.032 5.845
Discharges 2 B2 0.519 0.050 10.309 0.497 0.043 11.612
Discharges 3 B3 0.190 0.058 3.273 0.239 0.046 5.221
Discharges 4 B4 0.293 0.037 7.814 0.307 0.027 11.562
Discharges 1 x discharges 1 B11 -0.157 0.101 -1.550 0.006 0.086 0.070
Discharges 1 x discharges 2 B12 0.031 0.110 0.280 0.074 0.099 0.746
Discharges 1 x discharges 3 B13 -0.045 0.117 -0.390 -0.213 0.098 -2.165
Discharges 1 x discharges 4 B14 0.156 0.098 1.596 0.101 0.083 1.220
Discharges 2 x discharges 2 B22 0.312 0.198 1.570 0.583 0.168 3.474
Discharges 2 x discharges 3 B23 -0.265 0.180 -1.470 -0.545 0.142 -3.828
Discharges 2 x discharges 4 B24 0.113 0.148 0.765 0.047 0.123 0.383
Discharges 3 x discharges 3 B33 0.000 0.237 -0.001 0.384 0.176 2.184
Discharges 3 x discharges 4 B34 0.259 0.172 1.506 0.311 0.136 2.283
Discharges 4 x discharges 4 B44 -0.548 0.137 -3.988 -0.459 0.120 -3.839
Price management C1 0.095 0.006 15.648 0.095 0.006 16.591
Price nursing C2 0.342 0.008 42.832 0.344 0.007 46.729
Price medical C3 0.041 0.003 14.388 0.037 0.003 14.079
Price support C4 0.096 0.007 14.450 0.094 0.006 16.306
Price materials C5 0.292 0.005 57.940 0.291 0.005 62.965
Price capital C6 0.134 0.002 64.125 0.139 0.002 74.551
Price management x price
management
C11 -0.016 0.026 -0.627 -0.063 0.025 -2.518
Price management x price
nursing
C12 -0.005 0.029 -0.169 0.014 0.028 0.486
Price management x price
medical
C13 0.013 0.008 1.555 -0.009 0.008 -1.130
Price management x price
support
C14 0.023 0.028 0.795 0.027 0.024 1.128

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Price management x price
materials
C15 -0.042 0.032 -1.320 -0.028 0.028 -0.985
Price management x price
capital
C16 0.027 0.020 1.334 0.060 0.018 3.383
Price nursing x price nursing C22 0.124 0.066 1.891 0.072 0.060 1.207
Price nursing x price medical C23 -0.016 0.012 -1.292 -0.002 0.012 -0.147
Price nursing x price support C24 -0.067 0.051 -1.320 -0.062 0.043 -1.435
Price nursing x price
materials
C25 0.020 0.053 0.376 0.077 0.047 1.654
Price nursing x price capital C26 -0.056 0.034 -1.670 -0.099 0.028 -3.459
Price medical x price medical C33 -0.018 0.006 -2.766 -0.015 0.006 -2.496
Price medical x price support C34 0.031 0.011 2.913 0.032 0.010 3.293
Price medical x price
materials
C35 -0.027 0.013 -1.988 -0.009 0.012 -0.714
Price medical x price capital C36 0.016 0.007 2.403 0.003 0.006 0.522
Price medical x price support C44 -0.016 0.058 -0.277 -0.057 0.047 -1.232
Price medical x price
materials
C45 0.036 0.050 0.711 0.043 0.041 1.038
Price medical x price capital C46 -0.006 0.039 -0.157 0.017 0.032 0.547
Price materials x price
materials
C55 0.064 0.053 1.198 -0.026 0.049 -0.523
Price materials x price capital C56 -0.051 0.003 -14.844 -0.058 0.003 -17.838
Price capital x price capital C66 0.071 0.002 29.539 0.076 0.002 35.626
Radiology D1 0.034 0.007 5.220 0.031 0.005 6.320
Radiology x radiology D11 0.015 0.004 3.557 0.012 0.003 4.013
Discharges 1 x price
management
E11 0.004 0.003 1.377 0.004 0.003 1.215
Discharges 1 x price nursing E12 0.006 0.005 1.207 0.008 0.005 1.834
Discharges 1 x price medical E13 -0.001 0.003 -0.269 -0.002 0.002 -0.767
Discharges 1 x price support E14 -0.022 0.004 -5.646 -0.022 0.003 -6.565
Discharges 1 x price materials E15 0.012 0.005 2.350 0.016 0.004 3.598
Discharges 1 x price capital E16 0.000 0.003 0.059 -0.005 0.002 -1.971
Discharges 2 x price
management
E21 -0.011 0.005 -2.353 -0.013 0.005 -2.938
Discharges 2 x price nursing E22 -0.029 0.007 -4.045 -0.017 0.007 -2.588
Discharges 2 x price medical E23 0.016 0.004 4.347 0.008 0.003 2.542
Discharges 2 x price support E24 0.027 0.006 4.749 0.024 0.005 4.835
Discharges 2 x price materials E25 0.021 0.007 2.845 0.018 0.007 2.777
Discharges 2 x price capital E26 -0.023 0.004 -5.976 -0.019 0.003 -5.637
Discharges 3 x price
management
E31 -0.001 0.005 -0.155 0.002 0.005 0.367
Discharges 3 x price nursing E32 0.024 0.007 3.259 0.008 0.007 1.227
Discharges 3 x price medical E33 -0.005 0.004 -1.223 0.006 0.003 2.073
Discharges 3 x price support E34 -0.021 0.006 -3.681 -0.013 0.005 -2.502
Discharges 3 x price materials E35 -0.002 0.008 -0.217 -0.010 0.007 -1.483
Discharges 3 x price capital E36 0.004 0.004 1.018 0.006 0.004 1.733
Discharges 4 x price
management
E41 0.014 0.004 3.249 0.013 0.004 3.298
Discharges 4 x price nursing E42 -0.004 0.007 -0.641 0.004 0.006 0.679
Discharges 4 x price medical E43 0.008 0.003 2.473 0.007 0.003 2.440
Discharges 4 x price support E44 0.005 0.005 0.934 0.000 0.004 -0.079
Discharges 4 x price materials E45 -0.038 0.007 -5.635 -0.039 0.006 -6.778
Discharges 4 x price capital E46 0.015 0.004 4.220 0.016 0.003 5.239

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Radiology x price
management
F11 0.000 0.000 0.158 0.000 0.000 -0.115
Radiology x price nursing F12 -0.003 0.001 -4.114 -0.004 0.001 -7.439
Radiology x price medical F13 0.000 0.000 1.189 0.001 0.000 3.064
Radiology x price support F14 -0.001 0.000 -1.388 0.000 0.000 -0.037
Radiology x price materials F15 0.002 0.001 3.085 0.002 0.001 3.968
Radiology x price capital F16 0.001 0.000 2.448 0.001 0.000 4.395
Discharges 1 x discharges 1 G11 0.020 0.012 1.696 0.002 0.008 0.231
Radiology x discharges 2 G12 -0.012 0.014 -0.855 -0.010 0.012 -0.905
Radiology x discharges 3 G13 0.026 0.014 1.813 0.033 0.012 2.843
Radiology x discharges 4 G14 -0.031 0.011 -2.682 -0.020 0.009 -2.297
Time x price management J11 0.003 0.032 0.102 0.001 0.035 0.034
Time x price nursing J12 0.128 0.046 2.755 0.153 0.048 3.156
Time x price medical J13 0.003 0.016 0.196 -0.008 0.017 -0.479
Time x price support J14 0.041 0.035 1.155 0.029 0.035 0.822
Time x price materials J15 -0.245 0.040 -6.189 -0.275 0.039 -7.007
Time x price capital J16 0.070 0.015 4.555 0.100 0.016 6.274

Table 1 shows that most parameter estimates are significant at the 5% level. For most
variables, the estimated parameters also obtain the expected signs. We have calculated
the theoretical conditions for monotonicity and concavity for the average firm. Since
the fitted cost shares are positive for the average firm, the theoretical condition for
monotonicity is satisfied for all inputs. A necessary condition for concavity of the cost
function is that the own partial elasticities of substitution are less than zero for all
inputs. This condition also upholds for all inputs. A sufficient condition is that the
matrix of partial elasticities of substitution is negative semi-definite. This condition
unfortunately does not uphold, since one of the eigenvalues is (slightly) positive. All
other eigenvalues are negative. Therefore, the sufficient condition is too tight. These
statements uphold for the outcomes of both estimation procedures.
Comparing the outcomes of the plain LSQ estimates and the iterative weighted LSQ, a
number of the estimated parameters are quite similar. Especially the estimates of the
parameters, corresponding to input prices and fixed resources, show great similarities.
On the other hand, there are also a few striking differences, in particular in respect of
the trend parameters. The IWLS estimated parameters a2-a7, representing the frontier
shift from year to year, are lower than the parameter estimates from the plain LSQ
estimation, implying that technical change is slower in comparison to the average cost
function, which may also take account of some cost efficiency changes. The
parameters, corresponding to the services produced, also show some substantial
differences. However, the calculated cost flexibilities for the average firm are identical
up to the third decimal ( 230 . 1 =
m
b ). Bigger differences can be found between the
parameters of the cross-terms of services produced. However, the LSQ estimates (and
partly also the IWLS-estimates) are rather unreliable. One of the most striking results is
that, apart from very few exceptions, the parameter estimates according to the IWLS-
estimation are far more efficient.

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In order to underline the plausibility of the estimates, we derive a few other
economically relevant outcomes. The first relevant outcome concerns the cost
efficiency scores. Figure 2 shows the distribution of the efficiency scores in 2009,
based on the IWLS estimation.


Figure 3 Distribution of cost efficiency scores, 2009

Figure 2 shows that, in 2009, approximately one quarter of the hospitals were (almost)
efficient. Furthermore, the inefficient hospitals show a plausible pattern of
inefficiencies. The average efficiency equals 95% with a standard deviation of 5%. The
minimum efficiency score equals 81%. When comparing efficiency scores between the
years, it appears that they are very robust (not presented in the figure). In 2003, the
average efficiency is a little bit lower (94%) and in 2008, it is a little bit higher (96%).
One of the serious drawbacks of the thick frontier approach is that it requires
sampling from a stratified sample. Since, in this procedure, we havent stratified the
sample at all, it is questionable whether, regardless of certain characteristics, each
hospital has an equal probability of being identified as an efficient hospital. Obvious
characteristics that may affect the probability of being (in)efficient are the size and the
year. Therefore, we inspect the distribution of the efficiency scores, related to year
and size. Figure 3 reflects the number of efficient hospitals in each year of the sample.


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Figure 4 Number of efficient hospitals by year

Figure 3 shows that the final selection of efficient hospitals is quite uniformly
distributed over the years, varying between 18 and 29. This shows that the procedure
does not tend to favour a particular year.
Another potential selection bias may occur with respect to the size of the hospitals.
Figure 4 reflects the frequency distribution with respect to the size (divided in four
quartiles with respect to the number of beds).


Figure 5 Number of efficient hospitals by size

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Figure 4 also shows that all the size categories are well represented by a substantial
number of efficient firms, although there seems to be a tendency for small hospitals to
be somewhat overrepresented and for large hospitals to be underrepresented.
Conclusions
This paper proposes an alternative class of stochastic frontier estimators. Instead of
making distributional assumptions on the error and efficiency component in the
econometric specification of a cost function model (or any other model), this class is
based on the idea that some observations contain more information about the true
frontier than others. If an observation is likely to contain much information, it will be
assigned a large weight in the regression analysis. In order to establish the weights,
we propose an iterative procedure. Since no a priori information is available, the first
step consists of running a standard Least Squares method. Subsequently, weights can
be determined by the residuals obtained and a user-specified weighting function. The
weights obtained allow for Weighted Least Squares (WLS) to be applied. Since the
WLS residuals will differ from the LSQ residuals, new weights will be determined by
means of an iterative procedure. In each step, the weights will be updated and a new
WLS regression will be estimated. Since the negative residuals, by definition, represent
the error component, the variance of these errors can easily be calculated and used as
an estimator of the variance of the normal distribution of the noise. Similar to SFA,
(expected) inefficiency and noise can be derived for all the other observations. The
iterative procedure stops as soon as the change in the parameters between two
iterations is less than a given threshold value.
The advantages of this approach are its high transparency, the easy application to a
full-specified model and its flexibility. It allows to directly observe which observations
determine the frontier for a large part. The easy expansion to a full-specified model
refers to a model that includes a cost function and its corresponding share equations.
Its flexibility refers to the use of several alternative weighting functions and the
easiness of testing for the sensitivity of the outcomes.
The model is applied to a set of Dutch hospital data (including about 550
observations). The outcomes of this application are promising. The model converges
rather quickly and presents reliable estimates for the parameters, the cost efficiencies
and the error components. About 25% of the hospitals are designated as efficient. The
average efficiency score is approximately 93%.
References
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stochastic frontier production function models. Journal of Econometrics, 6(1), 21-37.
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and Product Mix Economies in Banking. [Journal Article]. Journal of Monetary
Economics, 28(1), 117-148.

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Blank, J. L. T. (2000). Public provision and performance: contributions from efficiency
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"http://sepwww.stanford.edu/public/docs/sep103/antoine2/paper_html/index.html"
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Meeusen, W., & Van den Broeck, J. (1977). Efficiency estimation from Cobb-Douglas
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444.
Ondrich, J., & Ruggiero, J. (2001). Efficiency measurement in the stochastic frontier
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Verbeek, M. (2012). A guide to modern econometrics (4 ed.). Chichester: John Wiley &
sons, Ltd.
Wagenvoort, R. J. L. M., & Schure, P. H. (2006). A Recursive Thick Frontier Approach
to Estimating Production Efficiency*. Oxford Bulletin of Economics and Statistics,
68(2), 183-201.




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20. Least distance efficiency
measures satisfying strong
monotonicity on the efficient
frontier
Hirofumi Fukuyama
Fukuoka University, Japan
Kazuyuki Sekitani
Shizuoka University, Japan
Jianming Shi
Muroran Institute of Technology, Japan,
Abstract
In this study, we introduce and investigate least distance p-norm efficiency measures
that satisfy strong monotonicity on the efficient frontier.
Keywords: DEA, least distance measures, p-norm, strong monotonicity, shadow profit-
based dominated set, free disposal input-output set, efficient frontier
Introduction
In data envelopment analysis (DEA), mathematical programming is applied to
observed input-output data in order to assess the efficiency performance and provide
target information for managers of entities such as banks, hospitals and business units.
Each entity responsible for transforming multiple inputs to multiple outputs is called a
decision-making unit (DMU). In DEA, there are basically two frameworks for the
efficiency assessment and targeting: the greatest and the least distance frameworks.
Greatest distance measures generally provide efficiency targets that are obtained as the
farthest projections from the DMU to be assessed. Such measures include Tones
(2001) slacks-based measure of efficiency (SBM) and Cooper et al.s (1999) range-
adjusted measure of efficiency (RAM). These greatest distance efficiency measures
and projections are often used because of their computational ease. However, closest
or least distance projections are often more relevant than greatest distance projections
from the perspective of private or public managers. This is so because closer
efficiency targets may be reached with less effort. In a p-norm framework, RAM and
SBM are considered to be greatest distance 1-norm measures, i.e., they are obtained
by maximizing the 1-norm from the DMU being evaluated to the efficient frontier E .
It is well-known that the standard measures of CCR (Charnes-Cooper-Rhodes) and
BCC (Banker-Charnes-Cooper) do not satisfy strong monotonicity. This is due to the
fact that these measures identify improvement targets on the weakly efficient frontier

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W
E of the production possibility set, i.e., the one-step procedure of CCR and BCC
may identify targets on
W
E , but not on E, where
W
E E . CCR and BCC require two
steps to identify an efficiency target: measuring an efficiency score in the first step and
finding the target on E in the second step. However, these measures are not strongly
monotonic.
Briec (1998) proposed a family of least distance inefficiency measures under an
arbitrary p-norm, [1, ] p , and showed that the p-norm least distance efficiency
measure is reduced to the CCR measure when p is equal to positive infinity.
Therefore, Briecs (1999) inefficiency measure satisfies weak monotonicity. His
inefficiency measure may find an efficiency target on the weakly efficient portion of
the boundary.
Building upon the previous contributions, the present study develops least distance p-
norm inefficiency/efficiency measures that satisfy not only strong monotonicity over
the efficient frontier, but also some other desirable properties. For the development,
we exploit and extend an input-output set dominated by the evaluated DMUs
(decision-making units) input-output vector. This dominated set was utilized to
define non-radial supper-efficiency measures by Cooper et al. (2007), and was also
utilized to define a family of least distance p-norm inefficiency measures satisfying
weak monotonicity over the efficient frontier (Ando et al. 2012).
2. Axiomatic approach to least distance based DEA
2.1 Weak monotonicity
Let
L
R
+
be the L -dimensional nonnegative orthant, and let
L
R
++
be the L -dimensional
positive orthant. We assume that there are J decision-making units (DMUs), each
DMU
j
( =1, , ) j J . of which transforms N different inputs
N
j
R
+
x into M different
outputs
M
j
R
+
y . We assume that the production technology available to the DMUs
can be characterized by the production possibility set:
{
( , ) | canproduce }.
N M
T R
+
+
x y x y (1)
In this research we utilize two DEA representations of T: the constant returns to scale
reference technology expressed by

=1 =1
( , ) , , ,
J J
c N M
j j j j
j j
T R
+
+



`

)

x y x x y y 0 (2)
and the variable returns to scale reference technology expressed by

=1 =1 =1
( , ) , , =1, ,
J J J
v N M
j j j j j
j j j
T R
+
+



`

)

x y x x y y 0 (3)
where 0 is a zero vector with appropriate dimension. The weakly efficient frontier or
boundary of (1) is defined by

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{( , ) |( , ) <( , ) ( , ) }.
W
E T T x y x y x y x y (4)
From this definition, the weakly efficient frontier is the set of all the inputs and
outputs that are not strongly dominated. The efficient frontier of (1) is defined by

( , ) ( , )
( , ) ( , ) .
( , ) ( , )
E T T


`

)
x y x y
x y x y
x y x y
(5)
A real valued function ( , ) f x y defined on T is an inefficiency measure. The
desirable properties that ( , ) f x y should have are expressed as follows:
Axiom A: ( , ) E x y if and only if ( , ) 0 f = x y .
Axiom B. For any ( , ) T x y , 0 ( , ) f x y .
Axiom C. For ( , )
a a
T x y and ( , )
b b
T x y , ( , ) ( , )
a a b b
x y x y and
( , ) ( , )
a a b b
x y x y imply ( , ) > ( , )
a a b b
f f x y x y .
In this paper, we discuss efficiency measures with respect to p-norm
p
defined by

{ }
1/
1
if [1, )
max , , if
p
n
p
l
l
p
l l
z p
z z p
=

| |

|

\ . =

(6)
Armed with (6), we define a general least distance p-norm measure by

{ }
( , ) min ( , ) ( , ) ( , )
p
p
f E x y x y x y x y | | (7)
which is an inefficiency measure that identifies the closest point on E from an activity
( , ) x y . Pastor and Aparicio (2010) showed that an efficiency measure defined by

{ }
2
1 min ( , ) ( , ) Z E x x y y x y (8)
is not a strongly monotonic efficiency measure that seeks closest points over the
efficient frontier E . Recently, Ando et al. (2012) considered the following axiom
(Axiom C ) by relaxing Axiom C.
Axiom ' C : For ( , )
a a
T x y and ( , )
b b
T x y , ( , ) ( , )
a a b b
x y x y implies
( , ) ( , )
a a b b
f f x y x y .
Ando et al. (2012) developed a least distance inefficiency measure satisfying weak
monotonicity over E by modifying (7) as follows:

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( )
{ }
, min ( , ) ( , ) ( , ) , ( , ) ( , )
p
p
f E D = x y x y x y x y x y x y
,
(9)
where
{ }
( , ) = ( , ) ( , ) ( , ) . D x y x y x y x y (10)
The situation where an activity ( , ) x y belongs to ( , ) D x y means that x can product
y if ( , ) x y is feasible. Hence, ( , ) D x y represents a free disposal input-output set of
an activity ( , ) x y . ( , ) D x y is utilized to define a slacks-based supper-efficiency
measure in Cooper et al. (2007, p. 313). By incorporating ( , ) D x y into
{ }
min ( , ) ( , ) ( , )
p
E x y x y x y | | , Ando et al. (2012) shows that
p
f , defined in (9), is
weakly monotonic over E for all [1, ] p .
2.2 An extension of ( , ) D x y
This study extends (9) to a least distance efficiency measurement setting, in which
strong monotonicity is satisfied, i.e., all of Axioms A, B and C are satisfied. For this
purpose, we replace ( , ) D x y of (10) by by ( , ) D

x y with the following ( 0 )


dependent set of ( , ) x y :

1
( , ) =( , ),
1
( , ) = ( , ) , ( )
0 ( )
1
x y
x
y
D I
I



| |

+
|


|
= | |
`
|

|

|
|
\ .
)
\ .
x y x d y d
x y x y d
d

.
.

. (11)
In what follows, we show the profits associated with any activities in ( , ) D

x y do not
exceed the profit of ( , ) x y . That is, we utilize shadow prices of inputs and outputs of
a DMU in place of observed prices to interpret ( , ) D

x y where ( , ) x y attains the


maximum shadow profit. Therefore, we call ( , ) D

x y the shadow profit-based


dominated set.
( , ) D

x y extends ( , ) D x y by expanding the latter by a fixed . Let ( , )


p
f

x y be

{ }
min ( , ) ( , ) ( , ) , ( , ) ( , )
p
E D

x y x y x y x y x y , (12)
then it follows from
0
( , ) = ( , ) D D x y x y that
0
( , ) = ( , )
p p
f f x y x y and hence, ( , )
p
f

x y
is a natural extension of (9).
Now, let us explain how ( , ) D

x y and prices in dual space are related to . For


this purpose, we define, for a given 0 > , the following set of allowable multiplier
weights (shadow prices):

Proceedings of the 10
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( ) ( )
( ) ( )
1 1
, 1, , , , 1, ,
1 1 1 1
,
1
n m
N M
n m
n m
v n N w m M
N M N M
v w

= =

= =


+ + + +

`

+ =

)

v w
. .
(13)
We assume each component of
( ) , v w in (13) is positive. The following proposition
establishes an equivalent relationship between ( , ) D

x y and
( )
Proposition 1: ( ) ( ) , , D

x y x y wy vx wy vx ( ) ( ) , v w .

Proposition 1 indicates that, in
( ) , D

x y , there does not exist an activity, whose profit


exceeds that of the activity ( , ) x y for any price vector
( ) , v w in
( ) . Therefore, any
activities in
( ) , D

x y are no better than ( , ) x y from the viewpoint of shadow profit


values as far as ( ) , v w is in ( ) . At this point, it is appropriate to state that we have
restricted the existence region of allowable shadow prices to
( ) , and thus we need
to explicitly specify
( ) in relation to each fully efficient DMU. We suggest
constructing
( ) so that ( ) , T x y satisfies the following condition:

( ) ( ) ( )
( ) ( )
, , suchthat 0 , ( )
, suchthat 0 ( )
E a
b
=

x y v w wy vx
v w wy vx

(14)
It is known that, for any efficient activity ( , ) E x y , there is at least one positive
shadow price vector ( ) , v w satisfying
( ) , T wy vx wy vx x y . Furthermore,
since the efficient frontier is the union of finitely many faces, we can limit to finitely
many positive shadow price vectors for each efficient activity. Consequently, if we
select a sufficiently small 0 > , then the existence of
( ) is guaranteed. The
collection of shadow price vectors contains at least one positive price vector
( ) , v w
satisfying (a) in (14) for any efficient activity ( , ) E x y . That is,
( ) contains
information on shadow prices enough to describe the efficient frontier E . For all
shadow price vectors ( ) ( ) , v w , any activities ( ) , x y in
( ) , D

x y cannot have
higher shadow profits than the evaluated DMU ( , ) x y . Mathematically, we can
express this situation as follows:

( ) ( )
( ) ( ) ( )
( ) ( )
( ) ( )
( )
, ,
, , ,
,
max 0 , , ,
max 0 ,
D
D
T
E

=
=
x y x y
x y x y
v w
wy vx wy vx v w x y
wy vx x y


Proceedings of the 10
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3. Least distance inefficiency measure satisfying strong
monotonicity
Consider two cones translating the origin to ( , ) x y , ( , ) D x y and ( , ) D

x y , that satisfy
( , ) ( , ) D x y x y {( , )} ( , ) ( , ) D int D

x y x y x y (15)
for any positive , where int S is the interior of S .
Lemma 1: For any >0 , (15) holds.
Lemma 2: Choose ( , ) T x y and >0 arbitrarily and let
* * * *
( , , , ) x y x y be an
optimal solution of (12). If ( , ) = E D

x y or
{ } ( , ) = ( , ) E D

x y x y , then

* *
( , ) ( , ). int D

x y x y (16)
Lemma 3: Choose ( , ) T x y and >0 arbitrarily and let
{ }
( , ) ( , ) \ ( , ) D x y x y x y .
If ( , ) = E D

x y or
{ } ( , ) = ( , ) E D

x y x y , then
( , ) < ( , ) for all [1, ].
p p
f f p

x y x y (17)
The inequality (17) means that ( , )
p
f

x y satisfies strong monotonicity over E under


the assumption
{ } ( , ) ( , ) E D

x y x y . For a given positive value , any [0, )


and the cone ( , ) D

x y satisfy the two following conditions:



{ } ( , ) ( , ) = ( , ) E D E

x y x y x y (18)
( , ) \ ( , ) = . T E D E

x y x y (19)
The existence and choice of the positive value were discussed and provided in our
previous work (Fukuyama and Sekitani 2012) in a different context. The existence of
>0 guarantees Axiom C as well as Axiom A. For any face F of T , we define

1 =1
=1, =1, ,
( ) ( , ) .
= ( , )
N M
n m j j
n m
v w j J
VW F
F
=

+

`


)

vx wy
v w
vx wy x y
.
(20)
A face F is called a maximal efficient face if F E and a face G with G F
and G E implies G F . Since E consists of a finite number of maximal efficient
faces, we have L maximal efficient faces, say
1
, ,
L
F F , such that
=1
=
L
l l
E F . For any
( , ) E x y there exists an index {1, , } l L such that ( , )
l
F x y . Consider ( , ) T x y .
There exists ( , ) ( )
l
VW F v w such that > vx wy if and only if ( , )
l
F x y . Hence,
( , ) \ T E x y if and only if for every =1, , l L . there exists ( , ) ( )
l
VW F v w satisfying

Proceedings of the 10
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> vx wy . Let
{ }
*
1 1
=1, , ( , ) ( )
= min , , , , ,
max min
N M
l L VW F
l
v v w w
v w .
. . . (21)
It follows from
1 1
min{ , , , , , } 1/ ( )
N M
v v w w N M + . . , the definition of E and Motzkin's
theorem of the alternative that
*
0< 1/ ( ) N M + . Let the maximal be obtained by
( )
1
* 1
= 1 N M

+ , then we have 0< 1 .


Figure 1 shows a graphical representation of two dominated sets of
( ) , x y ,
represented by ( , ) D x y and ( , ) D

x y .
( )
B B
, N x y and
( )
C C
, N x y are normal cones of
( )
B B
, x y and
( )
C C
, x y , respectively. The set of all allowable shadow prices
( ) is
shown in the shaded area in two places. is chosen so that
( )
B B
, N x y and
( )
C C
, N x y are contained in ( ) . The shadow profit-based dominated set ( , ) D

x y ,
which is a proper superset of ( , ) D x y for any 0 >

and is shown as the area
described by two heavy broken lines, can be constructed from the set
( ) . For
example,
3 3
( , ) D x y

is obtained by moving the normal cone of


( ) to
3 3
( , ) x y .

Figure 1. Two Dominated Sets of ( , ) x y


Lemma 4: Choose ( , ) T x y and (0, ) arbitrarily and let ( , ) ( , ) D

x y x y , then
for every =1, , l L . , there exists ( , ) ( )
l l
l
VW F v w such that
0.
l l l l
v x w y v x w y (22)
Moreover, =0
l l
v x w y if and only if ( , ) =( , )
l
F x y x y .
Lemma 5: Choose ( , ) T x y and (0, ) arbitrarily. If ( , ) E x y , then







( )
E E
, D x y
( )
E E
, D

x y
( )
C C
, D

x y
( )
B B
, D

x y
( ) C C
, N x y
( )
( ) B B , N x y




1
x
2
x

Proceedings of the 10
th
International Conference on DEA Brazil2012 170
{ } ( , ) = ( , ) D E

x y x y . If ( , ) \ T E x y , then ( , ) = . D E

x y
Proposition 2: Choose (0, ) and [1, ] p arbitrarily. Then, ( , )
p
f

x y satisfies
strong monotonicity over E .
4. Summary and Conclusions
The present paper has developed a least distance p-norm efficiency (inefficiency)
measure satisfying strong monotonicity over the efficient frontier as well as efficiency
indication, zero-unity requirement, units invariance and translation invariance. For
the development of our measures, we exploit the shadow profit-based dominated set,
which has the interpretation of shadow prices and profits for the DMU being
evaluated. The shadow profit-based dominated set is an extension of the free
disposal input-output set that is utilized in the development of super-efficiency
measures. The fundamental difference between the two dominated sets is that the use
of the first set enables us to construct strongly monotonic least distance inefficiency
measures, whereas the use of the latter only guarantees weak monotonicity.
References
Ando K., A. Kai, T. Maeda, K. Sekitani (2012) Least Distance Based Inefficiency
Measures in the Pareto-Efficient Frontier in DEA, Journal of the Operational Research
Society of Japan 55: 73-91.
Briec, W. (1998) Hlder Distance Function and Measurement of Technical Efficiency,
Journal of Productivity Analysis 11: 111-130.
Cooper W.W., K. S. Park, d J. T. Pastor (1999) RAM: A Range Adjusted Measure of
Inefficiency for Use with Additive Models and Relations to Other Models and Measures
in DEA, Journal of Productivity Analysis 11: 5-42.
Cooper W.W., L.M. Seiford, K. Tone (2007) Data Envelopment Analysis, A
Comprehensive Text with models, applications, references and DEA-Solver Software,
second ed., Springer, New York
Fukuyama H., K. Sekitani (2012) An Efficiency Measure Satisfying the Dmitruk-
Koshevoy Criteria on DEA Technologies, Journal of Productivity Analysis 38: 131-143.
Pastor J.T., J. Aparicio (2010) The Relevance of DEA Benchmarking Information and
the Least-Distance Measure: Comment, Mathematical and Computer Modelling 52:
397-399.


Proceedings of the 10
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21. Maximal Allocated Benefit and
Minimal Allocated Cost and its
Application
Mozhgan Mansouri Kaleibar
*

Young Researchers Club, Tabriz Branch, Islamic Azad University, Tabriz, Iran,
mozhganmansouri953@gmail.com
Sahand Daneshvar
Tabriz Branch, Islamic Azad University, Tabriz, Iran, sahanddaneshvar1@yahoo.com
Abstract
In this paper, we investigate the problems of consensus-making among institution in
stock exchange with multiple criteria for evaluating performance when the players
(institutions) are supposed to be egoistic and the score for each criterion for a player
is supposed to be a positive score. Each player sticks to his superiority regarding the
criteria. This paper introduces the models for computing minimal cost ratio and the
maximal benefit for institutions.
Keywords: Cooperative Game, DEA, Game Theory, Stock Exchange, Weight
selection.
Introduction
Let us suppose n players each have m criteria for evaluating their competency or
ability, which is represented by a positive score for each criterion. As with usual
classroom examination, the higher the score for a criterion is, the better player is
judged to perform that criterion. For example, there are three students A, B and C,
with three criteria of linear algebra, real analysis and numerical analysis. The scores
are their records for the three subjects, measured by positive cardinal numbers. All
players are supposed to be selfish in the sense that they insist on their own advantage
on the scores. Similar situations exist with many societal problems. We now present
some of the potential applications of DEA game. In the literature on cooperative game
theory, there have been many applications to cost or benefit sharing problems. The
proposed DEA game models are in sharp contrast to them, in that we can deal with
these problems under multi criteria environments that are common to real conflicts
in our society. This paper through allocating and imputing the given benefit [6]
propose a new scheme for computing maximal allocated benefit and minimal
allocated cost for the institutions under the framework of game theory and data
envelopment analysis (DEA). The different sections of this paper are sequenced in the
following order:

*
Corresponding author

Proceedings of the 10
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In section 2, the basic models are described and some properties of problem are
proved. In section 3, the extensions to the basic model and computing the ratios by
proposed models are discussed. In section4, a numerical presentation of real data
from a Stock Exchange of Tehran is elaborated on. Finally, section 5 includes
conclusions and some remarks.
Basic models of the game
In this section, we introduce the basic models and structures of the game.
Selfish behavior
Let ( )
m n
ij
X x R

+
= be the score matrix, scores of player j in the criterion i for
1,..., i m = and 1,..., j n = and
0
ij
x >
. It is assumed that the higher score for a criterion
is, the better player is judged to perform as regard to that criterion. Each person k has
a right to choose two sets of nonnegative weights
1
( ,..., )
k k k
m
w w w = to the criteria that
are most preferable to the player. Using the weight
k
w , the relative scores of player k
to the total score
are defined as follows:
1
1 1
(1)
( )
m
k
i ik
i
m n
k
i ij
i j
w x
w x
=
= =



The denominator represents the total score of all players as measured by player k s
weight selection, while the numerator indicates player k self evaluation using the same
weight selection. Hence, the expression (1) demonstrates player k relative importance
(share) under the weight (or value) selection
k
w . We assume that the weighted scores
are transferable. Player k wishes to maximize this ratio by selecting the most
preferable weights, thus resulting in the following fractional program.
( )
1
1 1
( 2)
( )
. 0
k
m
k
i ik
i
m n
w
k
i ij
i j
k
i
w x
Max
w x
s t w i
=
= =



The motivation behind this program is that player k aims to maximize his relative
value as measured by the ratio: the weighted sum of his records vs. the weighted sum
of all players' records. This arbitrary weight selection is the fundamental concept
underlying DEA initiated by Charnes et al. [2]. DEA terms this as variable weight, in
contrast to a prior fixed one. Refer to cooper et al. [10] for further explanation of this
issue.
Before continuing, we reformulate the problem as follows, without losing generality.
We normalize the fuzzy data set X so that it is row-wise normalized, i.e.,

1
1 ( )
n
ij
j
x i
=
=

.

Proceedings of the 10
th
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For this purpose, we divide the row
1
( ,.., )
i in
x x by the row-sum
1
n
ij
j
x
=

for 1,..., i m = .
The program (2) is not affected by this operation. Thus, using the Charnes-Cooper
transformation scheme, the fractional program (2) can be expressed using a linear
program as follows:
1
1
( )
. 1, 0 (3)
m
k
i ik
i
m
k k
i i
i
c k Max w x
s t w w i
=
=
=
=


Apparently, the optimal solution is given by assigning 1 to
( )
k
i k
w for the criterion i(k)
such that } {
( )
1,.....,
i k ik
x Max x i m = =
and assigning 0 to the weight of remaining
criteria. We denote this optimal value by c(k).
( ) 1,...,
ik
c k x k n = = (4)
The c(k) indicates the highest relative score for player k which is obtained by the
optimal weight selecting behavior. The optimal weight
( )
k
i k
w may differ from one
player to another.
Theorem 1.
1
( ) 1 (5)
n
k
c k
=


That is, sum of maximized scores is greater or equivalent 1.
Proof. Let the optimal weight for player k is
* * * *
1 ( )
( ..., ), 1
k k mk i k k
w w w w = = and
0( ( ))
ik
w i i k

= then, we have
*
( ) 1
1 1 1 1 1
( ) 1
n n m n n
i k ik i k k k
k k i i k
c k w x x x
= = = = =
= = =


The inequality above follows from
( ) 1 i k k k
x x
and the last equality follows from the
rowwise normalization.
This theorem asserts that, if each player sticks to his egoistic sense of value and insists
on getting the portion of the benefit as designated by c(k), the sum of shares usually
exceeds 1 and hence c(k) cannot fulfil the role of division of the benefit. If eventually,
the sum of c(k) turns out to be 1, all players will agree to accept the division c(k),
since this is obtained by the players most preferable weight selection. The latter case
will occur when all players have the same and common optimal weight selection.
More concretely, we have the following theorem.

Theorem 2.
The equality
1
( ) 1
n
k
c k
=
=

holds if and only if our data satisfies the condition


1 2
....
k k mk
x x x = = =
, 1,..., k n = .
That is, each player has the same score with respect to the m criteria.
Proof. The (if) part can be seen as follows:

Proceedings of the 10
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Since
1
( )
k
c k x = for all k, we have:
1
1 1
( ) 1
n n
k
k k
c k x
= =
= =


The (only if) part can be proved as follows. Suppose
11 21
x x > then there must be
column 1 h such that
1 2 h h
x x < , otherwise the second row sum cannot attain 1. Thus
we have
11 2 1
(1) , ( )
h h
c x c h x x > and
1
( ) ( 1, )
j
c j x j h . Hence it holds that
1 2 1
1 1, 1
( ) 1
n n n
j h j
k j h j
c k x x x
= = =
+ > =


This leads to a contradiction. Therefore player1 must have the same score in all
criteria. The same relation must hold for the other players.
In the above case, only one criterion is needed for describing the game and the
division proportional to this score is a fair division.
However, such situations might only occur in rare instances. In the majority of cases,
we have
1
( ) 1
n
k
c k
=

.
Coalition with additive property
Let the coalition S be a subset of player set (1,..., ) N n = . The record for coalition S is
defined by ( ) ( 1,..., ) (6)
i ij
j S
x S x i m

= =


These coalitions aim to maximize the outcomes c(S).
1
1
( ) ( )
. 1 , 0 (7)
m
i i
i
m
i i
i
c S Max w x S
s t w w i
=
=
=
=


The c(S) with ( ) 0 c = , defines a characteristic function of the coalition S. Thus this
game is represented by (N,c).
Definition 1. A function f is called sub additive if for any S N and TN with ST
= the following statement holds: ( ) ( ) ( ) f S T f S f T + .
Definition 2.A function f is called super additive if for any S N and T N with S
T = the following statement holds: ( ) ( ) ( ) f S T f S f T + .
Theorem 3. The characteristic function of c is sub additive, for any S N and T N
with ST = we have ( ) ( ) ( ) (8) c S T c S c T +

Proof. By renumbering the indexes, we can assume that { } 1,..., , { 1,..., } S h T h k = = +
and { } 1,..., S T k = . For these sets, it holds that
1 1 1
( ) ( ) ( )
k h k
ij ij ij
i i i
j j j h
c S T Max x Max x Max x c S c T
= = = +
= + = +


Theorem 4. ( ) 1 c N = .

Proceedings of the 10
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Proof.
1 1 1
( ) 1
m n m
i ij i
i j i
c N w x w
= = =
= = =

.
A DEA minimum game
The opposite side of the game can be constructed by (N,d) as follows :
1
1
( )
. 1, 0 (9)
m
k
i ik
i
m
k k
i i
i
d k Min w x
s t w w i
=
=
=
=


The optimal value d(k) assures the minimum division that player k can expect from
the game .
Theorem 5.
1
( ) 1
n
k
d k
=

(10)
Analogous to the max game, for the coalition S N, we define
1
1
( ) ( )
. 1 , 0 (11)
m
i i
i
m
i i
i
d S Min w x S
s t w w i
=
=
=
=


Theorem 6. The min game (N,d) is super additive we have ( ) ( ) ( ) d S T d S d T + for
each S, T N with S T =
Proof. By renumbering the indexes, we have { } 1,..., , { 1,..., } S h T h k = = + and
{ } 1,..., S T k = . For these sets it holds that
1 1 1
( ) ( ) ( )
k h k
ij ij ij
j j j h
d S T Min x Min x Min x d S d T
= = = +
= + = +


Thus this game starts from d(k)>0, 1,..., k n = and enlarge the gains by the coalition
until the grand coalition N with d(N)=1 is reached .

Theorem 7. ( ) ( \ ) 1 d S c N S S N

+ =
Proof. By renumbering the indexes, we can assume that { } 1,..., , {1,..., } S h N n = = and
{ } \ 1,..., N S h n = + .For this sets, it holds that
1 1 1 1 1
1 1 1 1
( ) ( \ ) ( )
(1 ) 1 1
h n n n n
ij ij ij ij ij
i i i i
j j h j j h j h
n n n n
ij ij ij ij
i i i i
j h j h j h j h
d S c N S Min x Max x Min x x Max x
Min x Max x Max x Max x
= = + = = + = +
= + = + = + = +
+ = + = +
= + = + =






Proceedings of the 10
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Extensions
In this section, we extend the basic model to maximal allocated benefit and minimal
allocated cost.
Maximal allocated benefit
Suppose that there are s criteria for representing benefits. Let ( 1,..., )
ij
y i s = be the
benefits of player ( 1,..., ) j j n = where u
1
( ,..., )
s
u u is the virtual weights for benefits.
Analogous to the expression (1) we define the relative score of player j to the total
scores as:
1
1 1
(12)
( )
s
i ij
i
s n
i ij
i j
u y
u y
=
= =



Player j wishes to maximize his benefits. We can express this situation by the linear
program below:
1
1 1 1
. ( ) 1, 0 ( 1,..., )
0 (13)
s
i ij
i
s n s
i ij i ij
i j i
i
Max u y
s t u y u y j n
u i
=
= = =
= =


The weights of benefits are nonnegative. A characteristic function of the coalition S is
defined by the linear program below:
1
1 1 1
( )
. ( ) 1, 0 ( 1,..., )
0 (14)
s
i ij
i j S
s n s
i ij i ij
i j i
i
c S Max u y
s t u y u y j n
u i
=
= = =
=
= =




In the program (14), the benefits of all players are nonnegative. Since the constraints
of program (14) are the same for all coalitions, we have the following theorem.

Theorem 8. The maximal allocated benefits game satisfies a sub- additive property.
Proof. For any S N andT N withS T = , we have:
1 1
1 1 1 1
( ) ( )
( ) ( ) ( ) ( )
s s
i ij i ij ij
i j S T i j S j T
s s s s
i ij i ij i ij i ij
i j S i j T i j S i j T
c S T Max u y Max u y y
Max u y u y Max u y Max u y c S c T
= =
= = = =
| |
= = +
|
\ .
| |
= + + +
|
\ .





Proceedings of the 10
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International Conference on DEA Brazil2012 177
Minimal allocated cost
Suppose that there are m criteria for representing costs. Let ( 1,..., )
ij
x i m = be the costs
of player ( 1,..., ) j j n = where v
1
( ,..., )
m
v v is the virtual weights for costs. Player j
wishes to minimize his costs then we have:
1
1 1 1
. 1, 0 ( 1,..., )
0 (15)
m
i ij
i
m n m
i ij i ij
i j i
i
Min v x
s t v x v x j n
v i
=
= = =
= =



The weights of costs are nonnegative. A characteristic function of the coalition S is
defined by the linear program below:
1
1 1 1
( )
. 1, 0 ( 1,..., )
0 (16)
m
i ij
i j S
m n m
i ij i ij
i j i
i
d S Min v x
s t v x v x j n
v i
=
= = =
=
= =




In the program (16), the costs of all players are nonnegative. Minimal allocated costs
game satisfies a superadditive property.

Theorem 9. The maximal allocated benefit game (N,c) and min game (N,d) are dual
games, for any S N, we have ( ) ( \ ) 1 d S c N S + = .
Proof.
1 \ 1 1 1
1 1
( \ ) ( ( ( )) ( )
(1 ) 1 ( ) 1 ( ).
s s s s
i ij i ij ij i ij i ij
u u u
i j N S i j N j S i j N i j S
s s
i ij i ij
u u
i j S i j S
c N S Max u y Max u y y Max u y u y
Max u y Min u y d S
= = = =
= =
= = =
= = =




In above programs we presented a scheme for computing maximal benefit ratio and
minimal cost ratio for coalitions. Also we can compute maximal benefit ratio and
minimal cost ratio for members of coalition, using extended programs in this paper.
These results are applied by the following section.
Avoiding occurrence of zero weights and setting preference on
weights
In above programs we presented a scheme for determining the weights through the
program (13), (15). Some weight may happen to be zero for all optimal solutions. This
means that the corresponding criterion is not accounted for in the solution of the
game at all. Let us suppose that all players agree to put preference on certain criteria.
The zero weight issue can thus be solved in this way. If all players agree to
incorporate preference regarding criteria, we can apply the following "assurance
region method". For example , we set constraints on the ratio w
1
, w
i
(i=2,,m) as:

Proceedings of the 10
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1
i
i i
w
L U
w
, (i=2,,m) where L
i
and U
i
denote lower and upper bounds of the ratio
1
i
w
w


, respectively. These bounds must be set by agreement among all players. The
program (3) is now modified as:
1
1
1
( ) ( )
. 1, ( 2,..., )
0 (17)
m
i i
i
m
i
i i i
i
i
c S Max w x s
w
s t w L U i m
w
w i
=
=
=
= =


Similarly, we can avoid occurrence of zero weight in linear programs of maximal
allocated benefits and minimal allocated costs. Then, we have:
1
1 1
1
1
. ( ) 1,
0 ( 1,..., ) (18)
( 2,..., ), 0
s
i ij
i
s n
i ij
i j
s
i ij
i
i
i i i
Max u y
s t u y
u y j n
u
L U i s u i
u
=
= =
=
=
=
=


1
1 1
1
1
. 1,
0 ( 1,..., )
( 2,..., ), 0 (19)
m
i ij
i
m n
i ij
i j
m
i ij
i
i
i i i
Min v x
s t v x
v x j n
v
L U i m v i
v
=
= =
=
=
=
=



The (13), (15) are modified in (18), (19) respectively.
1
1 1 1
1
( )
. 1, 0 ( 1,..., )
( 2,..., ) 0 (20)
s
i ij
i j S
s n s
i ij i ij
i j i
i
i i i
c S Max u y
s t u y u y i n
u
L U i s u i
u
=
= = =
=
= =
=


1
1 1 1
1
( )
. 1, 0 ( 1,..., )
( 2,..., ), 0 (21)
m
i ij
i j S
m n m
i ij i ij
i j i
i
i i i
d S Min v x
s t v x v x i n
v
L U i m v i
v
=
= = =
=
= =
=


The (14), (16) are modified in (20), (21) respectively.





Proceedings of the 10
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The minimal allocated cost and maximal allocated benefit in stock
exchange of Tehran
We now apply this approach to some institution in stock exchange of Tehran. There
are 15 capital institutions in this district. Clearly, using new programs shows the better
(successful) institution. Table 1 shows specifications of companies. Our sample
covers the period from 1 March 2010 to 1 September 2010. The data were obtained
from the stock exchange of Tehran.
Table 1: specifications of companies
company First
price
Stocks Remaining
capacity
Purchase
price
Change
rate
Selling
capacity
Selling
price
1 7000 4780617160 466334 6900 2.66 466334 7000
2 1428 2924848280 10606 1450 4 10606 1482
3 2406 62871272 210306 2406 3.97 1100 2441
4 1300 1271112850 5208061 1300 4 4000 1388
5 1399 741384210 168805 1399 3.93 19800 1419
6 2920 57660229402 5949865 2920 3.98 7500 3110
7 1661 172844210 4132704 1661 3.94 10000 1800
8 921 1343516580 389782 931 3.95 3168 926
9 1957 2278030900 4162032 1957 3.98 2207 2090
10 371 626186510 282201 371 3.92 1000 380
11 3396 14947079 35831910 3396 3.98 30000 3500
12 3500 4800709200 28682483 3500 3.98 1700 3699
13 955 590990420 1421379 930 3.91 1421379 955
14 1116 1970649670 5552335 1116 3.91 19960 1145
15 3139 861200190 475297 3139 3.97 10000 3189

Now we compute the inferiority and superiority criteria for institution.
Each institution uses 2 inferiority and 2 superiority criteria. In Tables 2 and 3
inferiority and superiority for these institutions (players) are given, respectively. Also
in Table 4, the results of approach are presented.




Proceedings of the 10
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Table 2: Inferiority criteria for the 15 institutions of stock exchange
Player
j
x
1j
= First price
Stocks
2j
sellingcapacity
x
sellingprice
=


1 3.34643201210
13
67.5846
2 4.3346170310
11
7.314482759
3 1.511268280410
11
87.40897756
4 1.65244670510
12
4006.200769
5 1.0371965110
12
120.6611866
6 1.68368058510
13
2037.625
7 2.870944232810
11
2488.081878
8 1.2373787710
12
418.670247
9 4.45810647110
12
2126.74093
10 2.32315195210
11
760.6495957
11 5.07602816410
12
10551.21025
12 1.6802482210
13
8194.995143
13 5.64395851110
11
1528.364516
14 2.19924503210
12
4975.210573
15 2.70330739610
12
151.4166932



Proceedings of the 10
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Table 3: superiority criteria for the 15 institutions of stock exchange
Player j y
1j
= Change rate
2j
remainingcapacity
y
purchaseprice
=

1 2.66 66.619143
2 4 7.156545209
3 3.97 0.450634985
4 4 2.88184438
5 3.93 13.95348837
6 3.98 2.411575563
7 3.94 5.5555
8 3.95 3.421166307
9 3.98 1.055980861
10 3.92 2.631578947
11 3.98 8.571428571
12 3.98 0.45958367
13 3.91 1488.354974
14 3.91 17.17030568
15 3.97 3.13577924



Proceedings of the 10
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Table 4: Maximal allocated benefit and Minimal allocated cost for Institutions
of stock exchange
Player
j
Maximal allocated
benefit

Minimal allocated
cost

1 0.0458 0.3859
2 0.0689 0.0052
3 0.0684 0.0017
4 0.0689 0.0190
5 0.0677 0.0151
6 0.0685 0.2478
7 0.0678 0.0329
8 0.0680 0.0254
9 0.0685 0.0512
10 0.0675 0.0027
11 0.0685 0.0583
12 0.0685 0.1928
13 0.9166 0.9166
14 0.0673 0.0065
15 0.0684 0.0351

First company has the minimal allocated benefit and the 13th has the maximal
allocated benefit. Clearly, this scheme is a way for attaining reasonable and fair
division for institutions.
Conclusions
In this paper, we have studied the common weight issues that connect the game
solution with arbitrary weight selection behaviors of the players (institutions). In this
regard, we have proposed a method for computing maximal allocated benefit and
minimal allocated costs for institutions. An extension of problem, in which both
superiority and inferiority criteria could be considered to players (institutions), has
been discussed. Furthermore a numerical example, in which some institutions of
stock exchange evaluated with the proposed ways, has been considered.


Proceedings of the 10
th
International Conference on DEA Brazil2012 183
References
A. Charnes, W.W. Cooper, Programming with fractional function, Naval Res. Logist.
Quart. 9 (1962) 181-185.
A. Charnes, W.W. Cooper, E. Rhodes, Measuring the efficiency of decision making
units, European Journal of Operational Research. 2 (1978) 429-440.
G. Owen, On the core of linear production games, Mathematical Programming. 9
(1975) 358-370.
G.R. Jahanshahloo, F. Hosseinzadeh Lotfi, S. Sohraiee, Egoists dilemma with interval
data, Applied Mathematics and Computation. 183 (2006) 94-105.
I. Nishizaki, M. Sakawa, Solution based on fuzzy goals in fuzzy linear programming
games, Fuzzy Sets and System. 115 (2000) 105-119.
K. Nakabayashi, K. Tone, Egoist's dilemma: a DEA game, The International of
Management Science. 36 (2006) 135- 148.
M. Sakawa, Fuzzy sets and Interactive Multiobjective Optimization, Plenum Press,
New York, 1993.
R. Allen, A.D. Athanassopoulas , R.D. Dyson , E. Thanassoulis, Weights restriction and
value judgment in data envelopment analysis, Annals of Operations Research. 73
(1997) 13-34.
S. Daneshvar, M. Mansouri Kaleibar, The minimal cost-benefit ratio and maximal
benefit-cost ratio, presented at the Int Conf. Engineering System Management and
Application Sharjah, UAE, 2010.
W.W. Cooper, L.M. Seiford, K. Tone, Data envelopment analysis, a comprehensive text
with models application references and DEA- solver software, Boston: Klawer
Academic Publishers, 2000.

Acknowledgements
The authors acknowledge the support from Young Researchers Club. This research is
supported by Tabriz Branch, Islamic Azad University research budget and
sponsorship.



Proceedings of the 10
th
International Conference on DEA Brazil2012 184
22. Measurement of returns to
scale using a non-radial DEA
model
Vladimir E. Krivonozhko
National University of Science and Technology MISiS, Russia, KrivonozhkoVE@mail.ru
Finn R. Frsund,
Department of Economics, University of Oslo, Norway, f.r.forsund@econ.uio.no
Andrey V. Lychev
National University of Science and Technology MISiS, Russia, lychev@misis.ru
Abstract
There are some specific features of the non-radial DEA (data envelopment analysis)
models which cause some problems under the returns to scale (RTS) measurement. In
the scientific literature on DEA, some methods were suggested to deal with the RTS
measurement in the non-radial DEA models. These methods are based on using strong
complementary slackness conditions (SCSC) in the optimization theory. In this paper,
we propose and substantiate a direct method for the RTS measurement in the non-
radial DEA models. Our computational experiments documented that the proposed
method works reliably and efficiently on the real-life data sets.
Keywords: Data envelopment analysis; Efficiency; Non-radial models; Returns to scale
Introduction
The measurement of scale properties of frontier functions estimated using DEA models
may in some cases be problematic. In particular the non-radial DEA models (Banker
et al., 2004) can possess some specific features that give rise to estimation problems.
First, multiple reference sets may exist for a production unit. Second, multiple
supporting hyperplanes may occur on optimal units of the frontier. Third, multiple
projections (a projection set) may occur in the space of input and output variables. All
these features cause certain difficulties under measurement of returns to scale of
production units.
Banker et al. (2004) proposed a two-stage approach to determine returns to scale in
the non-radial models. Sueyoshi and Sekitani (2007) showed that this approach may
generate incorrect results in some cases. An interesting approach was proposed for
measurement of returns to scale based on using strong complementary slackness
conditions (SCSC) in the non-radial DEA models (Sueyoshi and Sekitani, 2007).
However, our theoretical consideration and computational experiments show that the
SCSC non-radial model may not be efficient from the computational point of view.
The SCSC non-radial model generates ill-conditioned basic matrices during the

Proceedings of the 10
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solution process, which results in strange results that do not coincide with the
optimal solution of the corresponding non-radial DEA model. This naturally
contradicts the optimization theory.
In our work we propose a two-stage approach to measure returns to scale in the non-
radial DEA models. At first stage, an interior point, belonging to the optimal face, is
found using a special elaborated method. In Krivonozhko et al. (2012) it was proved
that any interior point of a face has the same returns to scale as any other interior
point of this face. At the second stage, we propose to determine the returns to scale at
the interior point found in the first stage with the help of Banker et al. (2004) method
or using the direct method of Frsund et al. (2007).
Our computational experiments documented that the proposed approach is reliable
and efficient for solving real-life DEA problems.
The plan of the paper is to state the problem to be investigated in the next section.
Then a direct method for discovering all units belonging to the minimum face is
developed. After this, some of the numerical experiments with the SCSC non-radial
model specification are reported.
Problem statement
The non-radial DEA model can be written in the following form (Banker et al., 2004;
Sueyoshi and Sekitani, 2007)
) ( max
+ +
+ = S C S C h
T T

subject to
, 0 , 0
, , , 1 , 0 , 1
,
,
1
1
1

= =
=
= +
+
=
+
=

S S
n j
Y S Y
X S X
j
n
j
j
o
n
j
j j
o
n
j
j j
.

(1)
where ) , , (
1 mj j j
x x X . = and ) , , (
1 rj j j
y y Y . = represent the observed inputs and
outputs of production units ) , (
j j
Y X , n j , , 1. = , ) , , (
1

=
m
s s S . and ) , , (
1
+ + +
=
r
s s S .
are vectors of slack variables. The superscript T indicates a vector transpose. The
components of the objective-function vectors
+
C and

C are specified as follows:


. , , 1 , }) , , 1 | min{
} , , 1 | (max{ ) (
, , , 1 , }) , , 1 | min{
} , , 1 | (max{ ) (
1
1
1
1
r i n j y
n j y r m c
m k n j x
n j x r m c
ij
ij i
kj
kj k
. .
.
. .
.
= =
= + =
= =
= + =



The model (1) is also called range-adjusted model (RAM) (Cooper et al., 2000).

Proceedings of the 10
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In the model (1), an efficiency score for unit ) , (
o o
Y X is evaluated, where ) , (
o o
Y X is
any production unit from the set ) , (
j j
Y X , n j , , 1. = . If the optimal value
*
h of the
model is equal to zero, then unit ) , (
o o
Y X is considered efficient, if 0
*
> h , then the
unit is inefficient (Banker et al., 2004).
The dual problem to the model (1) is written in the form:
{ }
0
min u Y u X v
o
T
o
T
+
subject to
, ,
, , , 1 , 0
0
+

= +
C u C v
n j u Y u X v
o
T
j
T
.
(2)
where ) , (
1 m
v v v . = and ) , , (
1 r
u u u . = are vectors of dual variables associated with the
first and the second group of constraints of problem (1),
0
u is a free variable
associated with the convex constraint.
In the papers (Sueyoshi and Sekitani, 2007, 2009), it was proposed to use strong
complementary slackness conditions from the optimization theory in order to find the
set of optimal solutions in the primal and dual space. The SCSC non-radial
model (Sueyoshi and Sekitani, 2007) is written in the following form

= +
= +
=
+ +
+ = +

= +
=
= =
= +
+ +

+ +
+
+
=
+
=
=

r i c u s
m k c v s
n j
u Y u X v
u Y u X v S C S C
C u C v
n j u Y u X v
S S n j
Y S Y
X S X
i i i
k k k
j
T
j
T
j
o
T
o
T T T
j
T
j
T
j
n
j
j o
n
j
j j
o
n
j
j j
, , 1 ,
, , , 1 ,
, , , 1
,
,
, ,
, , , 1 , 0
, 0 , 0 , , , 1 , 0
, 1 ,
,
max
0
0
0
1 1
1
.
.
.
.
.

(3)
In paper (Sueyoshi and Sekitani, 2007), the problem (3) is used in order to find the
minimum face that contains the set of optimal solutions (a projection set) on the
efficient hyper-surface of production possibility set T in the space of input and output
variables. Next, two additional fractional-linear optimization problems are determined
for measurement of returns to scale.
The SCSC non-radial model is very interesting as a theoretical idea. However, our
computational experiments show that the model (3) may generate strange results even
for medium-size problems using well-reputed optimization software. The size of the
model (3) increases significantly in comparison with the model (1). Indeed, the size of
the model (3) is equal to ) 2 2 2 ( ) 2 2 3 3 ( + + + + + + n r m n r m , where m is the number
of inputs, r is the number of outputs, and n is the number of production units.

Proceedings of the 10
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Remember that the size of the model (1) is equal to ) ( ) 1 ( n r m r m + + + + , and n is
usually much greater than ) ( r m+ in real-life models.
In order to investigate our suspicions about what will happen when using larger real
datasets, we conducted computational experiments using two middle-sized models.
For the first model, call it Model 1, we took the data for electricity utilities in Sweden
1987; see Frsund et al. (2007). For Model 2 we took the data from 920 Russia banks
financial accounts for January 2009.
In the computational experiments we used the well-reputed optimization software
CPLEX, the software Mathematica that is very popular among mathematicians, and the
software FrontierVision, a specially elaborated program for DEA models that enables
one to visualize the multidimensional frontier with the help of constructing two- and
three-dimensional sections of the frontier.
The main discrepancies in solving model (1) and model (3) with the help of the
program CPLEX (though theoretically optimal solutions of these problems have to
coincide) are as follows: a) efficiency scores of model (1) and model (3) may differ
significantly; b) reference sets obtained in the solution of model (3) may contain
inefficient units.
Direct method for discovering all units belonging to the minimum
face
In the linear programming problem (1), the set of optimal points
*
(the set of
projections of unit ) , (
o o
Y X on the frontier) are situated on the boundary (frontier) of
the production possibility set T. The boundary consists of a number of faces.
The solution set
*
cannot belong to different faces that do not have common points,
otherwise interior points of T would belong to the solution set. Thus, optimal
solutions of set
*
can belong only to the intersection of some faces of the set T .
Lemma 1. Let two different faces
1
and
2
of the set T intersect. Then faces
1
and
2

do not have common interior points, i.e. =
2 1
ri ri .

Corollary 1. Let two different faces
1
and
2
of the set T intersect. Then only one
from the following cases occurs:
(i) one face belongs to the other face entirely, to be precise let
2 1
, and set
2 1
is
a part of the boundary of
2
;
(ii) set
2 1
is a part of the boundary of the face
1
and face
2
, moreover the set
2 1
is also a face and its dimension is less than the dimensions of the face
1
or the
face
2
.
From the assertions written above, it follows that faces can intersect only along the
boundaries of these faces. Taking into account also that the number of faces of the
set T is finite, we obtain that there exists a face of minimum dimension
min


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containing set
*
. By virtue of the non-negativity constraints on slack variables and the
specific objective function associated with all slack variables in problem (1), set
*

may constitute only some part of face
min
.
Now, we proceed to the construction of the procedure that finds all production units
belonging to the minimum face
min
and to the set
*
.
Let problem (1), respectively problem (2), be solved by the simplex-method (Dantzig
and Thapa, 2003) and optimal primal variables ; , , 1 , {
*
n j
j
. = ; , , 1 ,
*
m k s
k
. =


} , , 1 ,
*
r i s
i
. =
+
and dual variables ; , , 1 , {
*
m k v
k
. = } ; , , 1 ,
*
0
*
u r i u
i
. = be obtained.
Determine the following index sets for primal variables
}. , , 1 , 0 | {
}, , , 1 , 0 | {
}, , , 1 , 0 | {
*
*
* *
r i s i I
m k s k I
n j j I
i y
k x
j
.
.
.
= > =
= > =
= > =
+ +

(4)
Introduce the index sets associated with the dual variables
}. , , 1 , | {
}, , , 1 , | {
}, , , 1 , 0 | {
*
*
*
0
* * *
r i c u i J
m k c v k J
n j u Y u X v j J
i i u
k k v
j
T
j
T
.
.
.
= = =
= = =
= = + =
+

(5)
Since the optimal solution is obtained with the help of the simplex-method, every
non-basic variable is equal to zero. However, some basic variables may be equal to
zero also, then the optimal solution is considered degenerate.
For the dual problem (2) all indices belonging to the set ) (
*
u v
J J J contain a basic
set of indices. However, the set ) (
*
u v
J J J may also contain non-basic indices, in
this case the dual problem (2) is considered degenerate. Thus, the following relations
hold
) ( ) (
* *
u v B y x
J J J J I I I
+
,
where
B
J is a set of optimal basic variables of the problem (1).
Variables
*
j
,
*
I j determine only one point on the minimum face. To find all points
belonging to the face
min
it is necessary to solve additional problems.
Problem
ol
Q (
*
J l ):
l l
f = max
subject to

Proceedings of the 10
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, , 0 , , 0
, , 0 , 1
,
,
*
*
*
*
u i v k
j
J j
j
o
J i
i i
J j
j j
o
J k
k k
J j
j j
J i s J k s
J j
Y s e Y
X s e X
u
v

=
=
= +
+

(6)

where
m
k
E e

and
r
i
E e
+
are identity vectors associated with variables

k
s and
+
i
s ,
respectively.
Notice that problem (6) includes only those variables for which the corresponding
dual constraints hold strictly equations for optimal dual variables (5). According to the
dual theorems of linear programming, this means that optimal variables of problem (6)
will also be optimal variables of problem (1).
The Procedure that finds all production units belonging to the minimum face
min
and
to the set
*
is described as follows:
Initialize sets =
o
J ,
*
J JH = , =
1
J . If the set JH is not empty, then go to the
next step. If set JH is empty then go to step 3.
Choose index JH l , if the set JH is empty, then go to step 3. Solve the problem (6).
If 0
*
>
l
f , then determine l J J
o o
= . If 1
*
=
l
f , then l J J =
1 1
. Delete index
l
from
the set l JH JH \ = . Go to the beginning of the step.
If 0
*
=
l
f , then delete index l from the set l JH JH \ = . Go to the beginning of step 2.
Set
o
J determines the set of units belonging to the face
min
. Set
1
J determines the set
of units belonging to the set
*
.
The Procedure is completed.
The standard present-day optimization software generates only one point in the
multidimensional space as an optimal solution. However, this may be not sufficient in
order to determine returns to scale on the whole minimum face, since different
vertices of the face may display different returns to scale. Any unit from set
*
J may
belong to the minimum face. The standard software generates set
*
J as a by-product.
So, the Procedure enables one to check whether some unit from set
*
J belongs to the
minimum face or not. The validity of this assertion is based on the theorems given
below.
After running the Procedure, the minimum face
min
, containing the optimal set
*
,
can be written in the form:

Proceedings of the 10
th
International Conference on DEA Brazil2012 190
. , 0 , 1
, , ) , (
)
`

= = =


o j
J j
j
J j
j j
J j
j j min
J j
Y Y X X Y X
o
o o


(7)
However, some points of the set
min
may not belong to the set
*
on the frontier.
The set
*
is written as:
{
}. ) (
) (
, , , ) , ( ) , (
*
0
*
*
*
u Y C u
X C v X C Y C
Y Y X X Y X Y X
o
T
o
T T T
o o min
+
=
=
+
+
(8)
The Procedure enables one to find all units belonging to the face
min
and to the set
*
. The validity of this assertion is based on the following theorems.
Theorem 1. Let unit
r m
t
E Z
+
be an interior point of polyhedron
r m
E
+
, let also
unit
r m
p
E Z
+
be any point of this polyhedron, which is distinct from point
t
Z . Then
unit
t
Z can be represented as a convex combination of ) 1 ( + + r m units of set and
unit
p
Z enters this combination with a nonzero coefficient.
Theorem 2. The optimal value of problem (6) is strictly positive 0
*
>
l
f if and only if
unit ) , (
l l
Y X belongs to the minimum face
min
that contains the set
*
.
In essence, Theorem 1 says that, if some unit
p
Z is a vertex of face
min
or belongs to
the face, then it is necessary that there exists such solution that variable
*
p
enters this
solution with a nonzero coefficient.
Corollary 3. If the optimal value of problem (6) 1
*
=
l
f , then unit ) , (
l l
Y X belongs to
the set
*
.
If 1
*
=
l
f , then 1
*
=
l
, this means that
*
l
is the only non-negative -variable in the
optimal basis, hence unit ) , (
l l
Y X belongs to the set
*
.
It was proved in (Krivonozhko et al., 2012) that interior points of a face have the same
returns to scale, so it is sufficient to determine returns to scale at any interior point of
this face. An interior point ) , ( Y X of the face
min
can be chosen as a strong convex
combination of units from the set
o
J , that is
. , 0 , 1
, ,
o j
J j
j
J j
j j
J j
j j
J j
Y Y X X
o
o o
> =
= =





Returns to scale of unit ) , ( Y X can be measured by two methods at least. In the first
(indirect) method (Banker et al., 2004) the BCC model is solved at the first step, the
dimension of this problem is equal to ) ( ) 1 ( n r m r m + + + + , then at the second step

Proceedings of the 10
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International Conference on DEA Brazil2012 191
two additional problems are solved, the dimension of these two problems coincides
with the dimension of the BCC problem. Returns to scale is determined with the help
of dual variables.
In the second (direct) method (Frsund et al., 2009), an intersection of the set T and
two-dimensional plane is constructed with the help of some algorithms at the first
step. At the second step returns to scale of any point on the graph is measured by
using derivatives of this graph.
Computational experiments
However, the question arises: What is the payment for discovering all vertices of the
face
min
?
We calculated the number of iterations accomplished by CPLEX software in order to
solve problem (1) for all units ) , (
j j
Y X , n j , , 1. = of the Model 1. This number is
equal to 2876 = iterations. Next, we calculated the number of iterations
accomplished by CPLEX in order to solve problems (6) for all units ) , (
j j
Y X ,
n j , , 1. = . This number makes up 62 . 0 1782= = iterations in the problems of the
type (6). That is really not a heavy burden, even for an ordinary notebook.
Finding. The non-radial DEA models possess some specific features. However this is a
not a problem in order for find returns to scale of the set of optimal points. For this
purpose it is sufficient to find an interior point of the minimum face that contains the
set of optimal solutions of problem (1) and to determine returns to scale of this
interior point. Such solution requires much less computations than to solve problem
(1) for the specific unit.
Conclusions
In Sueyoshi and Sekitani (2007; 2009), a method was proposed in order to measure
returns to scale in the non-radial DEA models using strong complementary slackness
conditions. However, the size of the SCSC non-radial model (3) increases significantly
in comparison with the model (1). In particular, for the banks data set the size of basic
matrices during the solution process becomes ( 1840 1840 ) instead of ( 7 7 ) in the
model (1). In addition, some constraints in model (3) do not make sense from an
economic point of view. Unreliable solutions may follow due to these reasons.
In our method, it is sufficient to solve several problems of the form of model (1),
however such problems have much less variables than problem (1). Thus, the
proposed approach is reliable and efficient for solutions of real-life problems.
Moreover, it was stressed in Sueyoshi and Sekitani (2007) that the method of Banker et
al. (2004) cannot always generate reliable results because of difficulties described
above in the non-radial DEA models. However, the method of Banker et al. (2004)
can also be used to measure returns to scale from our point of view. For this purpose,
it is sufficient to take an interior point of the minimum face, which can be found by
the method proposed in this paper, after this one can use the method proposed
in Banker et al. (2004).

Proceedings of the 10
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International Conference on DEA Brazil2012 192
References
Banker, R. D., Cooper, W. W., Seiford, L. M., Thrall, R. M., and Zhu, J. (2004) Returns
to scale in different DEA models. European Journal of Operational Research 154(2),
345362.
Cooper, W. W., Park, K. S., and Pastor, J. T. (2000) RAM: A range adjusted measure of
efficiency. Journal of Productivity Analysis 11: 542.
Dantzig, G. B. and Thapa, M. N. (2003) Linear programming 2: Theory and Extensions.
New York: Springer-Verlag.
Frsund, F. R., Hjalmarsson, L., Krivonozhko, V. E., and Utkin, O. B. (2007) Calculation
of scale elasticities in DEA models: direct and indirect approaches. Journal of
Productivity Analysis 28: 4556.
Frsund, F. R., Kittelsen, S. A. C., and Krivonozhko, V. E. (2009) Farrell revisited
Visualizing properties of DEA production frontiers. Journal of the Operational
Research Society 60: 15351545.
Krivonozhko, V. E., Frsund, F. R., and Lychev, A. V. (2012) Returns-to-scale properties
in DEA models: the fundamental role of interior points. Journal of Productivity
Analysis 38(2): 121130.
Sueyoshi, T. and Sekitani, K. (2007) Measurement of returns to scale using a non-radial
DEA model: A range-adjusted measure approach. European Journal of Operational
Research 176: 19181946.
Sueyoshi, T. and Sekitani, K. (2009) An occurrence of multiple projections in DEA-
based measurement of technical efficiency: theoretical comparison among DEA
models from desirable properties. European Journal of Operational Research 196: 764
794.

Acknowledgements
The research is carried out with financial support of the Programme of Creation and
Development of the National University of Science and Technology MISiS. The
reported study was partially supported by RFBR, research projects No.11-07-00698 and
No.12-07-31136.



Proceedings of the 10
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International Conference on DEA Brazil2012 193
23. Multimethodology applied to
the assessment of
municipalities health
performance in Brazil
Marcos Pereira Estellita Lins
Production Engineering Program POLI-COPPE/UFRJ, Post Office Box 68507, CEP 21945-970 - Rio
de Janeiro, RJ, Brasil, estellita@pep.ufrj.br
Sergio Orlando Antoun Netto
Department of Cartography/Engineering School/UERJ - COPPE/UFRJ, 524 So Francisco Xavier
Street, 5
st
floor - Rio de Janeiro CEP 20550-013, sergioantoun@gmail.com (corresponding author)
Abstract
This work presents a strategic approach to the formulation and structuring of health
problem in 5565 Brazilian municipalities using Concept Map and Data Mining. In
addition, using the Operational Research Method called DEA (Data Envelopment
Analysis) for the determination of counties goals and performance indicators and the
establishment of benchmarks for regulating the public health sector in Brazil. The
analytical results will corroborate to a progressive incentive for greater productivity in
the Brazilian municipalities health.
Keywords: Data Envelopment Analysis (DEA), Data Mining, Concept Map,
Multimethodology, Public Health
Introduction
Data Envelopment Analysis (DEA) has been used to support public policy in
regulatory processes because of its ability to handle multidisciplinary problems and
deliver efficient targets. However, public policy is also characterized by its inherent
complexity, which requires taking a particular arbitrary perspective regarding the
system purpose and relevant factors.
As a comparative method in its essence, DEA requires that homogeneity prevail as
one of the key issues for the Decision Making Units under assessment. Nevertheless,
not much research has been devoted to either complexity or homogeneity in DEA
applications. One reason could be the small size of most databases in regulatory
problems, which does not allow the application of clustering procedures to data.
This work presents a strategic approach to the formulation and structuring of the
health problem, taking advantage of the large size database comprising 5565 Brazilian
municipalities. First it uses Concept Maps to represent the many factors that
characterize the complex issues involved in health performance management in Brazil.
Then heterogeneity is investigated and a Data Mining technique is applied to find
appropriate clusters of around a thousand municipalities.

Proceedings of the 10
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Actually, the philosophy behind these two approaches are emphasized by the US and
UK Operational Research schools, as shown in the respective societies websites; the
first prescribes the use of analytics in order to explore different approaches to the
database, while the second includes a critical step that consists of the analysis of
different approaches to problem structuring. Thus the use of multiple methodologies
is an inherent trend in both schools of OR.
This work employed a strategic approach to the formulation and structuring of
problems through the use of conceptual maps. Actually, in solving problems of
systems, "Soft" and "Hard" tools can be employed, and both may be used in a
complementary manner (Oral & Reisman, 2005). It improves the modeling of
efficiency in many ways, since stakeholders can acquire an accounting of the whole
system, while putting the quantitative indicators in a comprehensive and still
accessible context.
The application to municipality health comprises main causes of death in three
different age ranges, each one assessed by a different DEA model. Different profiles
according to life threatening and care provided by governmental authorities emerge
from the analysis.
Methods
According to Rosenhead and Mingers (2001), Concept Map is important to make
explicit when we are seeking proposals for dealing with complex problems and not
just solving a simplified part of a problem under a particular perspective. In this
former approach the structuring of matters, issues and situations is one of the stages of
the modeling at the very beginning of the decision-making process.
For Weis and Indurkhya (1999), data mining is the search for valuable information in
large databases, as a cooperative effort between men and computers. Men design
databases, describe problems and define goals. Computers check data and look for
patterns that match the goals established by men.
The Data Envelopment Analysis (DEA) has been used in the calculation of
performance indicators and to establish benchmarks for regulation of public sectors.
The method lends itself to use in multidisciplinary issues and multiagents may be used
in the estimation of production frontier functions or for incorporating the opinion of
specialists, like a multicriteria method.
Multimethodology is the "art" of use, combined, more than a methodology or part of
methodologies, in order to consider, in the best way, the various problems, as
proposed by Mingers and Brocklesby (1997). The multimethodology approach
assumes that there is a specific method that is more appropriate, but that all methods
have advantages and disadvantages that can be balanced.
Results and discussions
We developed the formulation and structuring of Public Health in Brazilian
municipalities using information from Public Health experts reported in legal
documents as Special Checking Accounts and press interviews with government
authorities as Federal Prosecutors, National Health Council, Parliament House, Minister

Proceedings of the 10
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for Science, Technology and Innovation, Comptroller General of the Union, Board of
Policies, Performance and Competitiveness Management linked to the Governing of
the Republic Presidency Council and members of non-governmental sectors as SUS
National Audit Department, SUS Auditors National Union and Brazilian Collective
Health Association. The formulation and structuring of Public Health in Brazilian
municipalities can make use of the concept maps shown in Antoun Netto (2012).
To implement the clustering technique we employed the Profile of Brazilian
Municipalities Database (MUNIC), from Brazilian Institute of Geography and Statistics
(IBGE), covering the year 2009. It consists of a survey of Municipal basic information
published annually by IBGE with information about 16 themes of 5565 Brazilian
municipalities, such as: human resources, legislation and municipal planning tools,
education, culture, sports, housing, transportation, health, environment, among others.
The software used for clustering was the Waikato Environment for Knowledge
Analysis (WEKA), a set of algorithms and programs produced by the University of
Waikato in New Zealand. The Weka is implemented in the Java language, which has
as main characteristic its portability, this way you can use it on different operating
systems. The WEKA is free software, i.e. is under GPL license and is available at http:
//www.cs.waikato.ac. nz /ml/weka.
In the Table 1 is a summary with the main feature of each grouping set by clustering
technique, using the WEKA.
Table 1: Main feature of each cluster
Cluster Main feature
1 High Public consortia participation with the Federal and State Government
2 Participation of variables near the average of the municipalities examined
3
Municipalities have an improved infrastructure in the area of health
compared to those of other groups, though not necessarily the ideal
4 Considerable participation of public Consortium between municipalities
5
Participation of the variables below average of the municipalities
examined

Antoun Netto (2012) has more details about the clustering technique in Brazilian
municipalities.
For the determination of municipal development targets and indicators in the area of
health we will consider clusters 1 and 3. Such a choice results from the following
facts:
a. Regarding Cluster 1, we want to investigate if municipalities that present high
participation of State and Federal Governments resources are employing those
resources efficiently and effectively.

Proceedings of the 10
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b. Analysis of Cluster 3 is particularly interesting because this cluster is composed
of municipalities with better infrastructure, compared to the other clusters. In this
work we will considered only the municipalities with population greater than or equal
to 50,000 for cluster 1 and 100,000 for cluster 3, aiming at minimizing possible
anomalies in the DEA models to be implemented.
To analyse the level of human development in a particular country we need to
conduct studies about various social indicators. A very important indicator for the
analysis is infant mortality, which corresponds to the number of children who die
before reaching one year of age. According to the IBGE, there has been a 50%
reduction in child mortality between 1990 and 2008, from 47 to 23.3 per 1,000 live
births. The proportion, however, is still not low according to the standards of the
World Health Organization (less than 20 per thousand).
It is worth mentioning that in Nations like Sweden, Norway and Canada the ratio is,
respectively, 3, 10.4 and 4.63 per 1,000 live births. The index can vary between
different cities, States and regions, as well as on the basis of income, i.e. the low-
income sector presents always higher child mortality.
Another important indicator refers to diseases of the circulatory system that are the
leading causes of death in Brazil and in the world. The two main causes of mortality
within this group are ischemic heart disease and cerebrovascular disease.
The risk factors for cardiovascular diseases are very prevalent in urban populations,
currently being cardiovascular risk factors: smoking, overweight, excess meat
consumption of fats, physical inactivity, alcohol abuse, etc.
Mortality ratios are not distributed homogeneously in space. The inequality in
mortality from diseases of the circulatory system, whether on a national, regional or
local basis, is strongly associated with social and economic inequality and the
distribution of health equipment.
Finally, in view of violence growth in Brazilian municipalities, search in this study
consider the indicator of mortality from external causes, which include, according to
the World Health Organization, all types of accidents, suicides and homicides. High
rates of mortality are associated with higher prevalence of risk factors specific to each
type of external cause. Traffic accidents, homicides and suicides respond together for
about two-thirds of deaths from external causes in Brazil. The rates are considerably
higher in the young adult population, especially males.
It is worth emphasizing that the country's economic growth in recent years and
spending on public security higher than in some developed countries, such as
Germany and Spain, have not contributed to the reduction of homicides in Brazil,
according to the Yearbook of Brazilian Public Security. Given the above, the choice of
variables sought to contemplate the dimensions of child mortality, external causes and
diseases of the circulatory system. It is important to report that restrictions on weights
were not introduced in the templates.
Table 2 shows the variables to be considered within the model. The choice of
variables in DEA is a key issue for the determination of efficiency.



Proceedings of the 10
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Table 2 Variables identified in the case study
DIMENSION
External Causes
Circulatory
Diseases
Infant Mortality
INPUT
Deaths Chapter XX
- External causes of
morbidity and
mortality
Deaths Chapter IX
- Circulatory
Diseases
Deaths Chapter XVI -
Some disorders
originating in the perinatal
period
Deaths Chapter XVII -
Congenital malformations,
deformities and
chromosomal
abnormalities
OUTPUT
Resident Population
20 to 29 years old
Resident
Population
40 to 59 years old
Resident Population
< 1 year old

In determining targets and indicators of municipal development in the area of health,
each municipality is represented as a DMU (Decision Making Unit) endowed with
autonomy. We adopted a design of hierarchical modeling in 2 (two) stages, as
proposed by Lins et al. (2007) and Ozcan et al. (2010), namely:

In the first stage, we considered the output-oriented VRS basic models for
the three dimensions: infant mortality, circulatory diseases and external
causes.
In the second stage, we determined the final efficiencies for these
municipalities, using the weighted average.

In Table 3, we will present the first stage efficiency of municipalities in various
dimensions, by cluster, through the DEAFrontier software, developed by Professor Joe
Zhu of WPI (Worcester Polytechnic Institute).



Proceedings of the 10
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Table 3- Efficient Municipalities by dimension in the first stage

Dimension

Circulatory Diseases External Causes Infant Mortality
C
l
u
s
t
e
r

1

Manaus (AM)
Abaetetuba (PA)
Barcarena (PA)
Monte Santo (BA)
Manaus (AM)
Santarm (PA)
Monte Santo (BA)
Manaus (AM)
Abaetetuba (PA)
Belm (PA)
Frutal (MG)
Porto Ferreira (SP)
Almirante Tamandar (PR)
Concrdia (SC)
Laguna (SC)
Santa Cruz do Sul (RS)
Viamo (RS)
Aparecida de Goinia (GO)
C
l
u
s
t
e
r

3

Santana (PA)
Belo Horizonte (MG)
Uberlndia (MG)
So Paulo (SP)
Valinhos (SP)
Jaragu do Sul (SC)

Juiz de Fora (MG)
Pouso Alegre (MG)
So Paulo (SP)
Juiz de Fora (MG)
Maca (RJ)
Ourinhos (SP)
Salto (SP)
So Paulo (SP)
Curitiba (PR)
Porto Alegre (RS)
Santa Maria (RS)

In Table 4 we present the benchmarks municipalities resulting from aggregated
efficiencies of the three dimensions.


Proceedings of the 10
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International Conference on DEA Brazil2012 199
Table 4- Benchmarks Municipalities
Cluster Benchmark
1 Manaus (AM)
3 So Paulo (SP)

Conclusions
This work illustrated the use of conceptual maps for the design and structuring of the
Brazilian public health assessment. Knowledge mapping was used to establish a
context for the qualitative and quantitative variables, to be used in Data Mining and
Data Envelopment Analysis, respectively.
The approach used encompasses different major diseases that are prevalent and
representative of death risks at three different age ranges. The methodology intends to
evaluate three different processes and respective sets of variables that are not directly
related, and thus assessed in three different DEA models, constituting a first stage.
Differently from other approaches, we restrained the analysis to health closures,
represented by the worst situation, namely death occurrence. We intend to extend the
method to include other minor diseases.
Other recommendations for future research consider the evolution of efficiency along
the period 2009-2012, since the first coincided with the beginning of the current
mandate of mayors in Brazilian municipalities. We suggest the use of Malmquist
index to evaluate the actions and programs in the health municipalities during their
mandate, considering the change in the health performance of municipalities between
the two periods of time (2009 and 2012).
Finally, it is important to facilitate the validation of these results by qualified
healthcare professionals, regarding the potential for improvements and the
observation of the recommendations in the National Policy of Health Promotion,
whose general objective is to promote the quality of life and reduce vulnerability and
health risks related to its determinants and conditioning ways of living, working
conditions, housing, environment, education, leisure, culture and access to essential
goods and services.
References
Antoun Netto, S. O. (2012). O uso de Multimetodologia para a determinao de Metas
e Indicadores de Desenvolvimento Municipal na rea da Sade. Tese (doutorado)
UFRJ/ COPPE/ Programa de Engenharia de Produo.
Lins, M. E. et al. (2007). O uso da Anlise Envoltria de Dados (DEA) para avaliao
de hospitais universitrios brasileiros. Cincia & Sade Coletiva, 12(4): 985-998.
Mingers, J. ; Brocklesby, J. (1997). Multimethodology: Towards a Framework for
Mixing Methodologies, Omega, International Journal of Management Science, 25, 5
(pp. 489509).

Proceedings of the 10
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International Conference on DEA Brazil2012 200
Ozcan, Y.A.; Estellita Lins M.P., Lobo, M.S.C.; Silva A.C.M.; Fiszman, R.; Pereira, B. B.
(2010) Evaluating the Performance of Brazilian University Hospitals Annals of
Operations Research; ISSN:0254-5330; Springer.
Reisman, A.; Oral, M. (2005). Soft systems methodology: A context within a 50-year
retrospective of OR/MS." Interfaces 35.2, 164-78.
Rosenhead, J.; Mingers, J. (2001). Rational analysis for a problematic world: problem
structuring methods for complexity, uncertainty and conflict. 375p. 2. ed. West Sussex:
John Willey & Sons.
Weis S. M. e Indurkhya, N. (1999) Predict Data Mining; Morgan Kaufmann
Publishers, Inc.


Proceedings of the 10
th
International Conference on DEA Brazil2012 201
24. On the Measurement of Social
Efficiency in Microfinance
Institutions
Breno Sampaio
Department of Economics, Federal University of Pernambuco, brenorsampaio@gmail.com
*

Lcio Silva
Department of Production Engineering, Federal University of Pernambuco,
lucio_camara@hotmail.com
Abstract
Do Microfinance Institutions trade-off between financial and social efficiencies?
Previous evidence shows that a positive correlation exists. In this paper we argue that
previous results are biased because they do not account for differences between
countries. We propose a decomposition in which efficiency is broken down into a
MFI and a country component. Results are quite different from the ones previously
presented, given we isolate any country-specific characteristic that might bias
efficiency estimates. The correlation we estimate between financial and social
efficiency is about 35% of what was previously reported. Also, this correlation varies
within the financial efficiency distribution. Looking at profits, we obtain that they are
indeed correlated with efficiencies; the financial efficiency correlation is positive but,
contrary to previous findings, the social efficiency correlation is negative. Finally, we
show that countries indeed face different frontiers implying that efficiencies should be
assessed by comparing units within the same country.
Keywords: DEA, microfinance institutions (MFIs), social efficiency
Introduction
Microfinance Institutions (MFIs) are nowadays present in most countries around the
world. Their main purpose is to provide credit to the poor who are excluded from the
traditional banking system and, for this reason, they are widely recognized for their
contribution to the development of financial markets in the developing world.
Contrary to what is observed in the literature about the traditional banking sector, little
is known about the performance of MFIs, specially considering their mutual purpose
of being financially and socially efficient (Gutirrez-Nieto et al., 2009). Berguiga
(2009), for example, concludes after an extensive review that MFIs do not trade-off
between being financially and socially efficient, that is, the literature actually suggests
that these two requirements are compatible and may even be complementary. This
question is also addressed in Gutirrez-Nieto et al. (2009). They analyze both the
financial and social efficiency of Microfinance Institutions using data for 89 MFIs

*
Corresponding author

Proceedings of the 10
th
International Conference on DEA Brazil2012 202
located in several countries around the world. Additionally, they also look at the
relationship between these efficiencies, and how they relate to other indicators, such
as profitability, and the type of institutions - Non-Governmental Organization (NGO)
and non-NGO. Their main conclusions are that there is a positive, but low, correlation
between social efficiency and financial efficiency, NGOs are more socially efficient
than other MFIs that are run under other organizational structures, and, more
importantly, the geographical area of activity of the MFI was found to be important in
determining efficiency measures.
In this paper, our focus is to look at the interaction between financial and social
efficiencies but taking into account differences between countries, which is a
substantial improvement compared to previous studies on the subject. More
specifically, we invoke one of the most basic assumptions in DEA applications, which
require that the units being considered in the analysis must have the same production
process. That is, when comparing MFIs in different countries one must take into
account that significant differences may exist in terms of labor market conditions for
women, for example, which if not correctly accounted for may introduce significant
bias in the efficiency coefficients ultimately leading to misinterpretations of
inefficiencies given by country-specific limitations. Hence, to account for country-
specific characteristics when estimating MFIs financial and social efficiencies and to
look at how different are production possibility curves in different countries, we
propose a decomposition of efficiency similar to that taken by Portela and
Thanassoulis (2001) and recently by Amores and Contreras (2009), in which overall
efficiency is broken down into a MFI (financial and social) efficiency and a country
(financial and social) efficiency. This idea is similar to estimating a regression model
with country fixed effects to control for any unobserved country characteristics (see
Sampaio (2012)).
After this brief introduction, in the next section we present the data. In the third
section we describe the methodology and in the fourth section we present the results.
Finally, in the fifth section we conclude.
Data
The data source, as in most of the recent studies looking at MFIs (Gutirrez-Nieto et
al. (2009), among others), comes from the Microfinance Information Exchange (MIX)
database. The sample we use in this article was obtained by first dropping all MFIs
that had missing values on any of the variables used in the analysis and then
restricting our sample to include only countries that had at least 20 MFIs, given we
want to construct country-specific frontiers. All the data we use consider only the year
of 2008. This leaves us with 483 MFIs distributed within 14 countries. The two largest
countries, according to the number of MFIs analyzed, are Russia, with 78, and India,
with 57 microfinance institutions.




Proceedings of the 10
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Methodology
The Data Envelopment Analysis (DEA) Model
We estimate DEA efficiency scores using the CCR model of constant returns to scale,
which has been the model used in this specific literature. Given the main purpose of
our article is to improve upon what has been done in the literature, we follow the
input and output selection of Gutirrez-Nieto et al. (2009). There are three inputs: total
assets (A), represented by the total of all net asset accounts ($), taken directly from the
Mixmarket dataset; Operating Cost (C), defined as expenses related to operations,
such as transportation, office, and personnel expenses; and number of active
employees (E) employed by the MFI. The two financial outcomes considered are:
gross loan portfolio (L), defined as the outstanding balance of the all of the MFI's
outstanding loans including current, delinquent and restructured loan, but not loans
that have been written off (it does not include interest receivable); and financial
revenue (R), defined as the revenue generated from the gross loan portfolio and from
investments plus other operating revenue. The two social outcomes considered are:
number of active borrowers who are female (W); and an indicator of benefit to the
poorest (P), defined through the average loan balance per borrower and the per
capita Gross National Income.
The number of active borrowers who are female is taken directly from the Mixmarket
dataset. We interpret this as a measure of female empowerment at home or, in some
degree, within her society. The indicator of benefit to the poorest is another social
outcome of MFIs widely considered in the literature, since MFIs are partially designed
to provide financial services to the poorest in a given country. We follow Gutierrez-
Nieto et al. (2009) and define an indicator to benefit the poorest as the ratio between
the average loan balance per borrower and per capita Gross National Income
(pcGNI). The intuition is that wealthier individuals are able to borrow larger amounts.
Thus, if the average loan balance per borrower is low, then a larger fraction of poor
individuals are being financed. The division of the average loan balance per borrower
by per capita Gross National Income (pcGNI) is only intended to capture differences
in countries average per capita income, hence is it a normalization. This indicator is
then normalized again to lie on the interval [0,1] and inverted (one minus the
indicator), such that a number close to 1 represents a higher percentage of loans to
the poor. Finally, this new indicator is multiplied by the number of active borrowers,
such that one can construct an approximate measure of the number of poor
borrowers. In this paper we consider two main empirical DEA specifications: the
financial frontier, represented by inputs (Assests, Costs and Employees) and outputs
(gross loan portfolio and financial revenue), named as ACE-LR; and the social frontier,
represented by the same inputs but considers as outputs (number of active borrowers
who are female and the indicator of benefit to the poorest) and is named as ACE-WP.

The Efficiency Decomposition
The decomposition we adopt in this paper follows closely the one proposed by
Portela and Thanassoulis (2001). For our case, we will first compare MFIs within the
same country, such that country characteristics are isolated from final estimates,

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certainly not introducing any bias in the DEA efficiencies. Then, we will compare all
MFIs in a way that differences between countries production possibility curves will be
identified. Figure 1 shows how the decomposition works graphically. For simplicity
assume there are only two countries A and B and that there is only one input and one
output. Each triangle is a DMU, in this case a MFI, that is established in country A and
each square is a MFI established in country B. Solid lines represent the DEA efficiency
frontiers for each country (which we label as local efficiency - EFL), while the dashed
line represent the DEA efficiency frontier considering both countries analyzed (which
we label as global efficiency - EFG).
Now consider the MFI labeled as Z established in country B. Its DEA efficiency with
respect to other MFIs in the same country may be assessed by

1
, which we label as
MFI Efficiency (MFIE) and, in this case, is clearly smaller than 1 making Z an
inefficient MFI. This MFI, however, is not as inefficient as it would appear if all MFIs
efficiencies of all countries were assessed together, which we label as MFI Overall
Efficiency (MFIOE). In this case, Zs efficiency would be

2
<

1
. Thus, when pulling
every MFI together in a unique production frontier, previous analysis on this specific
topic, such as Gutirrez-Nieto et al. (2009), are introducing a negative bias in all MFIs
efficiencies.

Figure 1: Decomposition of Overall Efficiency

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Now we turn to the measurement of how efficiency frontiers vary within countries.
Note that the coefficient obtained by Gutirrez-Nieto et al. (2009), namely

2
,
represents two effects. First, it represents the lack of effort or ability of MFI Z that
prevents it from being efficient in comparison to all other MFIs in the same country.
And second, the possibilities of the country to provide/produce outputs, which we
label as Country Efficiency (CE). The CE, which is equal to the distance between each
country's local efficiency frontier and the global efficiency frontier,

2
, can be
obtained by

2
=

=
1



Results and discussions
Table 2 presents average efficiencies by country. First note that, as expected, MFIE are
always greater than MFIOE. Also, MFIE are not only a shifted version of MFIOE, that
is, there are substantial changes in the country ranking order if ones uses local or
global efficiencies measures. This is another evidence that comparisons between
financial and social efficiencies using global efficiency measures might be significantly
misleading.
Table 1: Financial and Social Efficiencies by Countries
Country Financial Efficiency Social Efficiency
MFIF MFIOE MFIF MFIOF
Bangladesh 0.895 0.679 0.831 0.425
Bolivia 0.941 0.736 0.475 0.116
Brazil 0.876 0.782 0.478 0.109
Ecuador 0.907 0.752 0.521 0.167
Ghana 0.862 0.577 0.433 0.300
India 0.892 0.723 0.666 0.642
Indonesia 0.861
0.689
0.382 0.179
Mexico 0.895 0.660 0.541 0.214
Nepal 0.894 0.682 0.550 0.423
Nicaragua 0.939 0.741 0.565 0.132
Peru
0.913 0.741 0.612 0.154
Philippines
0.835 0.643 0.547 0.197
Russia
0.870 0.837
0.291
0.089
Tajikistan 0.944
0.784 0.586 0.082

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To look at the correlation between financial and social efficiencies, we use a different
strategy than the one adopted by Gutirrez-Nieto et al. (2009). We estimate the
correlation between efficiencies by the following fixed effects model

= +.


where i and c stands for, respectively, the MFI and the country the institution is
located at; is the parameter of interest; and

and

are, respectively, a country


fixed effect and an error term. The estimated coefficients are presented in Table 2. In
column 1 we estimate the correlation via equation 2 of the efficiencies presented in
Table B1 of Gutirrez-Nieto et al. (2009). Columns 2 and 3 are the estimated
correlations using our data. As can be observed, the correlation between efficiencies
estimated in their paper is significantly higher than the correlation we obtain
considering country differences. This still implies that MFIs that are socially efficient
are also financially efficient, however, the relationship between them is much weaker
than what previous studies imply.
Table 2: Estimated correlations between Financial and Social Efficiencies
Variables (1) (2) (3)
Social Efficiency .252*** 0.89*** 0.90***
(.073) (.017) (.014)
Country Fixed Effects NO NO YES
Observations 89 483 483
Note: All regressions include a constant. Standard Deviation presented in parentheses.
*** indicates p<0.01.

We now estimate the relationship between efficiencies and profitability. This exercise
was also done by Gutirrez-Nieto et al. (2009) in which they obtained that the
correlation between social efficiency and profits was positive but never statistically
different from zero. We take the return on equity (ROE) as a measure of profitability
and compute correlations for financial and social efficiencies using our sample. Results
are presented in Table 4. As expected, financial efficiency is positively and
significantly correlated with ROE. On the other hand, the correlation between social
efficiency and ROE is found to be negative.
Table 4: Estimated correlations between ROE and
Financial and Social Efficiencies
Variables Financial Social
Social Efficiency . 000329** -.000524***
(.000145) (.000072)
Country Fixed Effects YES YES

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Note: Standard Deviation presented in parentheses. *** indicates p<0.01 and **
indicates p<0.05.

We now look at Country Efficiencies (CE) estimated by equation 1. As one can see in
Table 5, financial and social frontiers vary significantly between the countries in our
sample. The correlation between efficiencies is -.474 suggesting that countries with
high financial frontiers have low social frontiers. This, in our view, might be a result of
two effects: (a) MFIs located in different countries may face different conditions and
(b) different MFI types might be sorting themselves in different countries given some
country-specific characteristic. Both effects, however, imply that DEA efficiency
coefficients should be assessed by comparing units from the same country.

Table 5: Financial and Social Country Frontiers
Variables Financial Efficiency Social Efficiency
Efficiency Ranking Efficiency Ranking
Russia 0.962 1 0.303 9
Brazil 0.894 2 0.231 12
Ecuador 0.831 3 0.310 8
Tajikistan 0.829 4 0.132 14
Peru 0.810 5 0.240 10
India 0.808 6 0.951 1
Indonesia 0.797 7 0.419 5
Nicaragua 0.788 8 0.228 13
Bolivia 0.784 9 0.236 11
Philippines 0.769 10 0.330 7
Bangladesh 0.759 11 0.512 4
Nepal 0.748 12 0.744 3
Mexico 0.734 13 0.395 6
Ghana 0.666 14 0.800 2
Conclusions
In this paper we extend the analysis carried out by Gutirrez-Nieto et al. (2009) by
looking at the interactions between financial and social efficiencies but taking into
account differences between countries. Results are quite different from the ones
observed in Gutirrez-Nieto et al. (2009). Our estimate of the correlation between
financial and social efficiencies is much smaller (correlation is about 35% of what they
find). Looking at profits, we show that, as expected, financial efficiency is positively
and significantly correlated with ROE. On the other hand, the correlation between
social efficiency and ROE is found to be negative.
References
Amores AF & Contreras I. (2009). New approach for the assignment of new European
agricultural subsidies using scores from data envelopment analysis: Application to
olive-growing farms in Andalusia (Spain). European Journal of Operational Research,
193: 718-729.


Proceedings of the 10
th
International Conference on DEA Brazil2012 208
Berguiga I. (2009). Social Performance vs. Financial Performance of Microfinance
Institutions. Mimeo, East Paris University.
Gutierrez-Nieto B, Serrano-Cinca C & Mar Molinero C. (2009). Social efficiency in
microfinance institutions. Journal of the Operational Research Society, 60: 104-119.
Hallock K & Koenker R. (2001). Quantile Regression. Journal of Economic
Perspectives, 15: 143-156.
Mixmarket (2012). The Microfinance Information eXchange (MIX).
http://www.mixmarket.org/en/what.is.mix.asp, accessed in 8 May 2012.
Portela MCAS & Thanassoulis E. (2001). Decomposing school and school type
efficiency. European Journal of Operational Research, 132: 114-130.
Sampaio B. 2012. To Generalize or Not to Generalize? Comment on Robinson and
Davies. Journal of the Operational Research Society, 63: 563-565.



Proceedings of the 10
th
International Conference on DEA Brazil2012 209
25. Performance Evaluation in
Hospitals: a study on hospitals
financed by the Brazilian
Unified Health System
Antnio Artur de Souza
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG - Universidade Federal de Minas Gerais,
artur@face.ufmg.br
Emerson Alves da Silva
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG - Universidade Federal de Minas Gerais,
emersonls2008@hotmail.com
Douglas Rafael Moreira
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG - Universidade Federal de Minas Gerais,
douglas.moreira.1@hotmail.com
Alisson Maciel de Faria Marques
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG Secretaria de Estado de Sade de Minas
Gerais, amfmarques@yahoo.com.br
Ewerton Alex Avelar
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG - Universidade Federal de Minas Gerais,
ewertonaavelar@gmail.com
Bernardo Franco Tormin
Av. Antnio Carlos, 6627, Pampulha. Belo Horizonte-MG - Universidade Federal de Minas Gerais,
bernardo-ft@hotmail.com
Abstract
Hospitals have been forced to change because of both users pressure for higher
quality services and regulatory agencies pressure for better resources management.
Notably, low quality health services are directly derived from poor hospital
management and causes substantial user dissatisfaction. Against this background, this
paper reports on a performance evaluation of hospitals financed by the Brazilian
Unified Health System (SUS). It analyzes the performance of 20 hospitals (among
public and voluntary organizations) in seven States in 2008. Focusing on financial
management, it uses a set of operational ratios (i.e., Occupancy Rate, Average Length
of Stay, and Full Time Employees per Bed) as inputs, and financial ratios (i.e., EBIT
Margin, EBITDA Margin, Return on Assets, Return on Invested Capital, and Net
Margin) as outputs. The assessment framework confirms the hypotheses, and shows
that financial management efficiency differs between public and voluntary hospitals.
Keywords: Efficiency, Data Envelopment Analysis (DEA), Hospitals, Financial Ratios,
Operational Ratios, Public and Voluntary Hospitals.

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Introduction
Data Envelopment Analysis (DEA) is a non-parametric model used to assess efficiency
in a set of production units, named as Decision Make Units (DMUs) (Angulo Meza et
al. 2005). A DMU is a unit that is able to transform inputs into outputs (Azevedo et al.,
2012).
In the face of the need to improve processes and analyze the performance of
production units with a view to reaching maximum efficiency, DEA has been used as
an important tool for both researchers and policy makers. Besides, the model has
some characteristics that make it suitable for application in several types of analysis,
especially in complex organizations (Marinho 2001).
Struett (2005) and Smet (2009), among others, contend that hospitals are usually
complex organizations in which the management processes and performance
assessment processes are significantly intricate. These organizations can benefit from
DEA models, especially for performance evaluation and gaining insight into possible
improvement actions, as shown in some exploratory studies, such as Cesconetto, Lapa
& Calvo (2008), and Guerra, Souza & Moreira (2012).
This paper reports on a study aimed to develop three indicator frameworks and
analyze the efficiency of Brazilian hospitals that obtain funding from the Brazilian
Unified Health System (SUS). Three models were developed aiming to provide
support for improved financial management in hospitals building on operational
indicators. The study also included environmental variables (i.e., type of organization,
number of beds, and revenues) to understand whether these factors impact the scores
of the sample hospitals.
Methods
DEA Overview
DEA is a non-parametric model to assess efficiency of a set of production units, or
DMUs. A DMU is a decision-make unit capable of transforming multiple inputs into
multiple outputs (Azevedo et al. 2012; Moreira 2010). Unlike the parametric models,
DEA aims to optimize each DMU individually, determining an empirical efficient
frontier based on a set of resources (inputs) and outputs (Cesconetto, Lapa & Calvo
2008).
The model, first approached in 1978 by Charnes, Cooper & Rhodes drawing on Farrel
(1957), identifies efficient DMUs based on the assumption that they operate with
constant returns to scale, that is, outputs changes proportionally to changes in the
inputs. The literature refers to this model as CCR, which stands for the initials:
Charnes, Cooper and Rhodes. The assessment of DMUs considering variable returns to
scales (VRS) bases builds on the BCC model, which stands for Banker, Charnes &
Cooper (1984).
Efficiency calculation using DEA model can be oriented either to inputs or to outputs.
Input-oriented DEA aims at producing the same amount of outputs despite reducing
the use of inputs (Azevedo et al. 2012). On the other hand, output-oriented DEA aims

Proceedings of the 10
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at maximizing output despite keeping inputs unchanged (Gomes, Mello & Lins 2004;
Correia, Soares de Mello & Angulo-Meza 2011).
The major advantages of DEA are: (i) to classify each DMU as inefficient or efficient
(the DMU that is at the efficient frontier); (ii) to be based on individual observations,
instead of mean values; (iii) to incorporate inputs and outputs with different units of
measures; (iv) to identify optimal production and consumption values; (v) to identify
the inefficiency measure for every unit away from the frontier; (vi) to work without
converting all inputs and products in monetary units; and (vii) to consider discrepant
values as comparison parameters for the DMUs (Marinho 2001; Cesconetto, Lapa &
Calvo 2008).
The present study applies an output-oriented DEA with Variable Returns to Scale. The
analysis of hospitals financial performance involved separating public from voluntary
hospitals. It was employed the Multiplier Method as a mathematical method of
structuring the DEA.
Sample description and data collection
Financial indicators were obtained from secondary data containing hospitals financial
statements and accounting reports. Given limited data access, data collection was
restricted to the period of 2008. There was no aprioristic selection of the organizations
that would be included in the sample, their inclusion thus being related to financial
data availability.
The financial statements and annual reports were obtained from: (i) hospitals
websites; (ii) official state gazettes (in the case of So Paulo and Minas Gerais); and
(iii) results from Google
TM
search engine. Most data included poor specification of
accounts, which were inappropriately classified in the statements or were not
available. Therefore, the selection criteria also included data completeness and
reliability. This led to 20 hospital organizations from seven states (UF), namely: So
Paulo (SP), Minas Gerais (MG), Alagoas (AL), Cear (CE), Par (PA), Paran (PR), and
Rio Grande do Sul (RS).
The collected data were imported to MS Excel
TM
spreadsheets. Due to the variety and
amount of irrelevant accounts, a standardized Chart of Accounts was established to
serve as a model. This produced 55 financial indicators, which were subsequently
screened with a view to defining those that would make up a hospital efficiency
assessment framework (i.e., DEA models).
The indicators deemed as relevant to assess hospital performance were: (i) EBIT
Margin; (ii) EBITIDA Margin; (iii) Return on Assets (ROA); (iv) Return on Invested
Capital (ROIC); and (v) Net Margin. These indicators represent, therefore, the outputs
of the efficiency models formulated in the study.
The operational indicators (i.e., those related to the services provided and the
organizations performance) were obtained from DATASUS (a databank provided by
the Brazilian Unified Health System Informatics Department) and CNES (a national
register of health organizations). According to Guerra, Souza & Moreira (2012), these
sources provide a number of valuable data, including number of bed, medical
procedures, professionals, and patients, among others.

Proceedings of the 10
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These data were then imported to MS Excel spreadsheets in order to calculate the
operational indicators: Mean time of stay (TMP); Occupancy rate (TO); e Full time
workers (FTE) / Bed (FL). They were used as inputs in the efficiency models. The
financial and operational indicators were subsequently standardized, but preserving
their proportionality.
Finally, logarithmic transformations were performed to reduce discrepancy between
financial and operational indicators. Because of null values in the sample, 1 unit was
added to every indicator. The logarithm base selected was the highest value of every
indicator considering all the hospitals. This produced indicators with values between 0
and 1 in a scale that does not skew weight distribution in the model, and therefore,
the efficiency of each DMU.
Results and discussions
Setting up the models
Three models were set up for data analysis. The first (M1) approaches efficiency
focusing on the public nature of the hospitals and thus uses the indicators shown in
Chart 1. The expectation of this model is of relative homogeneity in the way to
measure profitability in public hospitals and voluntary hospitals (non-profit
organizations), as public hospitals usually do not register depreciation. Depreciation
can be seen as a non-financial expense that reduces the accounting profit of an
organization, which could thus benefit the results of public hospitals.
Chart 1: Models 1, 2 e 3 inputs and outputs.
Model Inputs Outputs
M1
Mean time of stay (TMP); Occupancy rate
(TO); e FTE / Bed (FL)
EBITDA Margin (ME1); e Return on Invested
Capital (ROIC)
M2
Mean time of stay (TMP); Occupancy rate
(TO); e FTE / Bed (FL)
EBIT Margin (ME2); Return on Assets (ROA);
e Net Margin (ML)
M3
Mean time of stay (TMP); Occupancy rate
(TO); eFTE / Bed (FL)
EBITDA Margin (ME1); Return on Invested
Capital (ROIC); EBIT Margin (ME2); Return on
Assets (ROA); e Net Margin (ML)
Source: Created by the authors.

The second model (M2) was estimated focusing on business indicators of profitability,
including depreciation and amortization expenses (cf. Chart 1). This model is assumed
to provide better performance results for voluntary hospitals, since their operational
result include revenues from private health insurances, which usually have greater
mean net margin and return on assets.
The third model (M3) is a combination of the two others (cf. Chart 1). The aim is to
assess how the efficiency scores behave, assuming that this behavior will resemble
one of the two other models, once the DEA will adjust the weight of the indicators
that lead to better scores.

Proceedings of the 10
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Results
Table 1 provides the mean efficiency scores of the organizations in the sample for
each model. The results show that the efficiency levels were significantly high in the
three models. Nevertheless, this does not mean that the organizations are efficient. As
efficiency in a DEA is the comparison of organizations within the sample, this simply
means that the financial results of these organizations are similar, that is, they have
similar production functions.
As expected, the first model (M1) pointed to lower levels of efficiency than the other
two models. As mentioned above, excluding depreciation expenses from the
profitability calculation would make the organizations financially similar.
Other important result was the similarity of results in models 2 and 3. Given the
increase in the indicator values in the third model the weights fit the most favorable
outputs. As the M2 indicators presented better results, M3 followed suit.

Table 1 Mean efficiency scores of the organizations
in the sample for each model
Model 1 Model 2 Model 3
0.7707 0.8412 0.8421
Source: Created by the authors.
Another objective of the research is to explore some environmental factors proposed
in the literature to assess the behavior of the efficiency scores. The first factor was
type of organization. Hospitals were divided into two groups: voluntary and public
hospitals. The results are shown in Table 2.

Table 2 Mean efficiency scores according to type of
organization, and model
Organization Public Voluntary
Model 1 0.8547 0.7387
Model 2 0.8911 0.8092
Model 3 0.8946 0.8104
Source: Created by the authors.

The efficiency scores of the public hospitals were higher than those of the voluntary
hospitals in all the models under scrutiny. The largest difference is found in M1, which
is the model in which the financial results are included more similarly for all
organizations in the sample.
Considering the number of beds, the results show that the organizations offering from
100 through 200 beds are those with the highest mean scores in all the models (Table
3). The results suggest that this amount of beds can provide the best economies of
scale to hospital organizations.


Proceedings of the 10
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Table 3 Mean efficiency scores according to number
of beds, and model.
Beds Model 1 Model 2 Model 3
0-100 0.6766 0.7581 0.7581
101-200 0.8516 0.9145 0.9145
201-300 0.7705 0.8396 0.8396
301+ 0.7803 0.8489 0.8514
Source: Created by the authors.

As for income (BRL million) in 2008, the results show that the hospitals earning 7-20
million Brazilian Reais had the best performance (Table 4). In order to understand
this, further studies should investigate the complexity of the services provided, as well
as the synergy among the procedures offered in the hospitals. This result could
suggest that these organizations have economies of scope.

Table 4 Mean efficiency scores according to
revenue (million BRL), and model.
Revenue Model
1
Model
2
Model
3
0-7 0.6667 0.7433 0.7433
7-20 0.8410 0.9228 0.9228
21-40 0.7868 0.8511 0.8511
41+ 0.7776 0.8333 0.8368
Source: Created by the authors.

Conclusions
This study aimed to analyze the financial management efficiency of Brazilian hospitals
building on operational indicators as inputs and financial indicators as outputs. The
results show that public hospitals have higher efficiency scores than the voluntary
hospitals in all the three models applied to the sample. This result, however, should
be observed with caution.
One limitation of this study is that human resources expenses are accounted
differently in voluntary and public hospitals. This expense is usually not allocated to
the public hospital organizations, rather to a central agency within the public
administration. This can skew the results, but the accounting information of this
central agency is not fully available.
Besides, DEA is a tool that is sensitive to a number of factors, including sample,
inputs, outputs, and period of observation. The relative nature of the tool should
always be regarded, especially in exploratory studies like this. Therefore, results vary
according to DMU inputs and/or outputs, and indicators. As this study was meant to
be a first attempt to design a model for hospital financial assessment, we hope that
further research draws on our results to develop more robust models.


Proceedings of the 10
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References
Angulo Meza, L.; Biondi Neto, L.; Soares de Mello, J. C. C. B.; Gomes, E. G. (2005).
ISYDS - Integrated System for Decision Support (SIAD - Sistema Integrado de Apoio
Deciso): a software package for data envelopment analysis model. Pesquisa
Operacional, 25(3): 493-503.
Azevedo G. H. I., Roboredo M. C., Aizemberg L., Silveira J. Q., Soares de Mello J. C. C.
B. (2012) Uso de anlise envoltria de dados para mensurar eficincia temporal de
rodovias federais concessionadas, Journal of Transport Literature 6 (1): 37-56.
Cesconetto A., Lapa J. S., Calvo M. C. M. (2008) Avaliao de eficincia produtiva de
hospitais do SUS de Santa Catarina, Brasil, Caderno de Sade Pblica 24 (10): 2407-
2417.
Charnes A., Cooper W. W., Rhodes E. (1978) Measuring the Efficiency of Decision
Making Units, European Journal of Operational Research 2: 429-444.
Correia T. C. V. D., Soares de Mello J. C. C. B., ngulo-Meza L. (2011) Eficincia
Tcnica das companhias areas brasileiras: um estudo com anlise envoltria de
dados e conjuntos nebulosos, Produo 21 (4): 676-683.
Farrel, M. J. (1957) The Measurement of Production Efficiency, Journal of Royal
Statistical Society 3: 253-290.
Gomes E. G., Mello J. C. C. B. S., Lins M. P. E. (2004) Redistribuio de Inputs e
Outputs em modelos de Anlise Envoltria de Dados com Ganhos de Soma Zero.
Pesquisa Operacional 24 (2): 269-284.
Guerra M., Souza A. A., Moreira D. R. (2012) Performance Analysis: A Study Using
Data Envelopment Analysis in 26 Brazilian Hospitals, Journal of Health Care Finance
38 (4): 19-35.
Marinho A. (2001) Estudo de Eficincia em alguns hospitais pblicos e privados com a
gerao de rankings, Rio de Janeiro, Instituto de Pesquisa Econmica Aplicada.
Moreira D. R. (2010) Anlise de Eficincia usando Data Evelopment Analysis e
Composio Probabilstica para Procedimentos Mdicos Referentes s Doenas
Isqumicas do Corao no Estado de Minas Gerais. 111f. 2012. Dissertao (Mestrado
em Engenharia de Produo) - Universidade Federal Fluminense. Niteri.
Neves A. P. T. P. (2009) Indicadores Financeiros e Operacionais para Avaliao de
Desempenho em Hospitais. 71 f. 2009. Monografia (Graduao em Cincias Contbeis)
Universidade Federal de Minas Gerais, Belo Horizonte.
Struett, M. (2005) Custeio baseado em atividades em laboratrios de anlises clnicas:
estudo de caso em um hospital filantrpico. 165 f. 2005. Dissertao (Mestrado em
Administrao) Universidade Estadual de Londrina, Londrina, 2005.


Proceedings of the 10
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26. Performance Evaluation of
expenditure in Primary Care:
the Case of Brazils
Southeastern cities.
Lucas Maia dos Santos
*

Instituto Federal de Minas Gerais Campus Sabar, admlucasmaia@hotmail.com
Mrcio Augusto Gonalves
Universidade Federal de Minas Gerais, marciouk@yahoo.com
Mrcia Mascarenhas Alemo
Universidade Federal de Minas Gerais, marcia.alemao@yahoo.com.br
Marco Aurlio Marques Ferreira
Universidade Federal de Viosa, marcoaurelio@ufv.br
Lucas Campos Vaz
Universidade Federal de Minas Gerais, lucascamposvaz@yahoo.com.br
Heloiza Azevedo Drummond
Universidade Federal de Minas Gerais, helodrumond@gmail.com
Abstract
This study aimed to analyze the performance of cities of Brazils southeastern region
in resource allocation on primary care, from 2007 to 2010. In order to do the
performance analysis, we used in this study the technical efficiency scores produced
by the Data Envelopment Analysis (DEA) methodology. But, before starting the cities
efficiency analysis, the cluster analysis was applied to group similar cities. This study
proposes an analytical model of the performance of 1097 cities, based on the National
Primary Care Policy. The efficiency scores obtained highlights the disparities in the
allocation of resources and the results obtained in primary care. This fact could be
justified due the absence of procedures of relative comparison between cities and the
decentralization of public expenses in public healthcare. The results shed light on the
possibility to improve the performance of primary care, given the current level of
resource allocation.
Keywords: Brazil. Primary Care. Performance. Public Expenditure. DEA.



*
Corresponding author

Proceedings of the 10
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International Conference on DEA Brazil2012 217
Introduction
According to the Ministry of Health (2008) the results which Brazil has obtained in the
healthcare area, considering the amount invested are below the expected results. Little
by little, the public policy makers begin to admit that money may not have been well
invested. Among the main possible solutions for the problem we can state: increase
the amount of financial resources probably unviable due to the resource limitation
or increase the efficiency in resource allocation.
Focusing on the above highlighted problems and seen the increasing of efficiency as a
feasible solution for the improvement of the results which Brazil has obtained in
healthcare sector, this study has aimed to answer the following question: what is the
performance of cities in the southeastern region of Brazil in primary care resource
allocation? In this context, measuring the technical efficiency in allocating resources as
a performance measure becomes a good opportunity. According to Selden and Sowa
(2004) and Scott and Davis (2007), the idea of performance is focused, typically, in the
outputs and outcomes of programs or policies. According to Farrel (1957) and Charnes
et al. (1978) technical efficiency is the ability to produce more outputs with a given
amount of inputs.
It is justified that the evaluation of efficiency in allocating public resources may serve
as an instrument to support public managers decision making as well as identifying
benchmark cities so that the inefficient cities may find the best practices in efficient
cities. In performance analysis, according to Greiling (2006), benchmarking is
designed to make learning easier as a continuum and systematic process of measuring
products, services and practices aiming at correcting failures and improving results.
This idea of a comparison between units of analysis by relative efficiency scores is
found in the performance analysis literature (SELDEN; SOWA, 2004; GREILING, 2006;
SCOTT; DAVIS, 2007).
Given the problems proposed and the justifications for conducting this study, the
general objective was to analyze the performance of cities in the southeastern region
of Brazil in primary care expenditure, from 2007 to 2010. More specifically, we
separated the groups of the most similar cities according to characteristics which could
have influence on efficiency scores and then applied the proposed efficiency model.
Methods
From the population of 1668 cities of Southeastern region of Brazil we chose only
cities which had at least one Family Health Team the group of physician, nurses,
nurse assistants and other professionals due to that are the main strategy of the
National Primary Care Policy. Afterwards, after an exploratory analysis of the data, we
excluded from the sample those with inconsistent variables and with the absence of
some observation for one or more analyzed years (2007-2010). It was excluded 570
cities because of that.
The final sample was comprised of about 70% of the cities in Minas Gerais, 60% of the
cities in the State of Esprito Santo, 50% of the cities in Rio de Janeiro and 52% of the
cities in So Paulo. In some cases, existing secondary data create an opportunity for
evaluative and simplified comparisons.

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For data collection and analysis, the National Primary Care Policy from 2006 was
established as the reference public policy. By this definition, the analysis period was
from 2007 - the first year of PNAB - to 2010, due to this being the last year with
available data in the researched databanks. All of these variables were collected and
tabulated during the period from July to September 2011.
Analysis procedures
In order to do the performance analysis we used in this study the technical efficiency
scores produced by the Data Envelopment Analysis (DEA) methodology. But, before
starting the cities efficiency analysis, the cluster analysis, according to Ferguson et al.
(2000) was applied to group similar cities.
In the cluster analysis we used the non-hierarchical k-means method quoted in
Maroco et al. (2005) and Hair et al. (2005) for partitioning the city groups.
According to Sugar and James (2003), a fundamental problem in cluster analysis is to
determine the best number of groups. In order to determine this number that shall be
used in the study we employed the Calinski and Harabaz index whose equations are
in Milligan and Cooper (1985) and Sugar and James (2003). According to Milligan and
Cooper (1985), the Calinski and Harabaz index is considered to be a robust index for
defining the number of clusters.
After the definition of the clusters, the measuring of efficiency was performed through
the use of the Data Envelopment Analysis (DEA) methodology, output-oriented
supposing variable returns to scale (BANKER et al., 1984).
The output orientation was applied because the objective of the cities must be to
increase the primary care services production and not to reduce the budget allocated
in the field. Also, quoted authors have discussed the scarcity of resources for this
sector, indicating that the increase in allocation efficiency is necessary (FLEURY, 2001;
WORLD BANK, 2004; MINISTRY OF HEALTH, 2008).
In this study, we have the availability of a panel of efficiency scores for verifying
changes in the productivity of these cities over the years in the allocation of resources
in primary care. According to Banker et al. (2005) the Malmquist index was proposed
by Caves, Christensen and Diewet (1982) with the objective of measuring changes in
productivity between two periods of time by the distance between a DMU and the
frontier of production for each period.
Analytical model for performance evaluation in Primary Care
resource allocation
What will define how similar the groups are internally are the variables inserted to
characterize them. In this study, the model for ranking the cities was built from four
dimensions considered to be important for primary care in health and that in some
way may have impact on the expenditure of distinct cities: private coverage,
development, size and poverty. Figure 1 describes the four dimensions.


Proceedings of the 10
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Figure 1 Dimensions for characterizing the cities
Source: Elaborated by the author

After the definition of the clusters we inserted some more variables available by
Ministry of Health for additional characterization the cities. These variables are related
to the cities infrastructures as the following ones:
Proportion of houses with water piping (x10
2
);
Proportion of houses with garbage collection (x10
2
);
Proportion of houses with sewage piping (x10
2
);
Proportion of houses made of bricks (x10
2
);
Proportion of houses which have electricity (x10
2
).
These variables were used because, according to the World Bank (2007), other factors
such as the access to drinking water and sanitation may also have an influence on
comparisons between expenditures and results.
With the formation of the groups it was possible to perform the relative technical
efficiency analysis. In this direction, the allocation of resources for the primary care
will be represented by the number of Family Health Teams and number of health
establishments. These two variables according to National Primary Care Policy
represent the sectors resource allocation.
The resource allocation model for performance evaluation in Figure 2 was built by
two inputs and three outputs. The first output was characterized by the number of
people registered by the Family Health Team. The number of people registered by the
Family Health Team, number of home visits of the Family Health Team and the
ambulatory production in primary care were the outputs of the model.
Development: HDI-M.
Source: United Nations
Development Program.
Size: Number of city
inhabitants. Source:
Brazilian Institute of
Geography and Statistics

Poverty: number of beneficiaries of
the government benefit Conditional
Cash Transfer program over city
residing population (x10
2
). Source:
Institute of Applied Economic
Research IPEA
Private Coverage: People with
private health coverage over number
of people registered by Family Health
Team (x10
3
). Source: Ministry of
Health.

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Figure 2 The model of technical efficiency in allocating resources on primary care
Source: elaborated by the authors
Results and discussions
Comparing groups we can affirm that, in general, Group 2, shown in Table 1,
presented lower averages for all the variables used to rank them, except for
proportion of the population covered by the Conditional Cash Transfer program.
Group B was, after the Cluster analysis, partitioned into Groups 3 and 4. It was
possible to see that, for the analyzed dimensions, groups 1, 2, 3 and 4 were formed
with cities of different sizes, but similar by other dimensions.
Despite this fact, Group 2, with the lowest private coverage has the cities with the
lowest population and, by analyzing the quartiles, 75% of these have less than 12
thousand inhabitants. This group also showed the smallest averages for the other
variables, indicating the presence of the smallest cities and also the poorest of the
sample.

Health
establishments in
primary care.
People registered by the
Family Health Team (x10
-3
)
Number of home visits of the
Family Health Team (x10-3).
Ambulatory production in
Primary Care (x10
-3
).
Inputs Outputs
FOR
PRODUCING
Family Health
Teams (ESF).

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Table 1 Descriptive Statistics Group A split in Group 1 and Group 2
*
Gr Variable N Avg Min Max 25% Median 75%
G1
WATER 360 76.17 4.56 100.00 67.97 80.06 90.27
GARBAGE 360 81.00 23.32 100.00 71.88 83.71 92.88
SEWAGE 360 68.00 0.00 100.00 55.21 74.21 87.94
BRICK 360 95.75 46.28 100.00 95.04 98.71 99.61
ELECTRICITY 360 97.46 0.00 100.00 97.25 98.79 99.42
PRIVATE 360 47.54 0.00 100.00 24.37 46.26 71.17
TRANFER 360 5.77 1.23 10.59 4.49 5.80 7.11
POPULATION 360 27.58 1.20 830.67 4.76 10.40 22.76
HDI 360 0.76 0.67 0.85 0.74 0.75 0.78
G2
WATER 255 60.35 0.66 99.91 46.69 61.70 74.40
GARBAGE 255 53.71 0.14 100.00 37.53 54.61 68.75
SEWAGE 255 41.13 0.00 100.00 15.94 42.10 62.13
BRICK 255 93.27 34.70 100.00 92.25 97.87 99.32
ELECTRICITY 255 90.60 50.95 100.00 87.12 94.21 97.96
PRIVATE 255 20.33 0.00 83.37 4.71 15.36 32.38
TRANFER 255 10.48 6.77 16.60 9.14 10.33 11.60
POPULATION 255 9.92 1.65 52.98 4.66 6.95 11.88
HDI 255 0.67 0.57 0.75 0.65 0.68 0.70
Variables: WATER proportion of houses with water piping (x10
2
); GARBAGE proportion of cities
with garbage collection (x10
2
); SEWAGE proportion of houses with sewage piping (x10
2
); BRICK
proportion of houses made of bricks (x10
2
); ELECTRICITY proportion of houses which have
electricity (x10
2
); PRIVATE proportion of population covered by private healthcare assistance (x10
-3
);
TRANSFER proportion of population benefited by the Conditional Cash Transfer program (x10
2
);
POPULATION population living in the city (x10
-3
); HDI Human Development index; Gr group.
Tests results: highest pseudo-F of Calinski and Harabaz: 362.71; p-value<0.01 for univariate normality
asymmetry and kurtosis test and bivariate and multivariate normality of Doornik-Hansen; p-value<0.01
for differences between the groups G1 and G2 by the Kruskal-Wallis non-parametric test.
Source: research results.
Table 2 Descriptive Analysis Group B split in Groups 3 and 4*
Gr Var N Avg Min Max 25% Median 75%
G3
WATER 306 89.86 0.87 100.00 84.52 95.42 98.91
GARBAGE 306 93.60 45.30 100.00 91.04 97.04 99.54
SEWAGE 306 82.52 0.17 100.00 75.09 90.87 98.16
BRICK 306 96.29 57.34 100.00 96.97 99.27 99.74
ELECTRICITY 306 98.53 86.16 100.00 98.21 99.14 99.58
PRIVATE 306 187.97 100.10 568.51 140.81 180.49 227.24
TRANFER 306 3.53 0.76 7.27 2.71 3.52 4.35
POPULATION 306 98.92 1.05 2.41 13.20 34.12 94.23
HDI 306 0.80 0.73 0.92 0.78 0.80 0.82
G4
WATER 176 77.61 0.51 100.00 66.90 81.57 93.00
GARBAGE 176 79.61 25.43 100.00 71.43 82.17 92.22
SEWAGE 176 68.76 0.00 99.97 55.19 75.85 89.36
BRICK 176 95.04 23.81 100.00 95.02 98.93 99.70
ELECTRICITY 176 97.61 73.33 100.00 97.04 98.72 99.41
PRIVATE 176 120.72 100.08 396.38 121.31 136.10 172.33
TRANFER 176 6.75 2.95 13.76 5.45 6.47 7.67
POPULATION (in 1,000) 176 23.37 1.39 356.53 5.22 9.55 19.33
HDI 176 0.74 0.57 0.80 0.73 0.75 0.76
Variables: WATER proportion of houses with water piping (x10
2
); GARBAGE proportion of cities with garbage
collection (x10
2
); SEWAGE proportion of houses with sewage piping (x10
2
); BRICK proportion of houses made
of bricks (x10
2
); ELECTRICITY proportion of houses which have electricity (x10
2
); PRIVATE proportion of
population covered by private healthcare assistance (x10
3
); TRANSFER proportion of population benefited by the
Conditional Cash Transfer program (x10
2
); POPULATION population living in the city (x10
-3
); HDI Human
Development index; Gr group.
Tests results: highest pseudo-F of Calinski and Harabaz: 314.02; p-value<0.01 for univariate normality asymmetry
and kurtosis test and bivariate and multivariate normality of Doornik-Hansen; p-value<0.01 for differences between
the groups G3 and G4 by the Kruskal-Wallis non-parametric test.
Source: research results.

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Group 1 and Group 4 have similar characteristics, except for the private coverage
percentage. While Group 1 has 75% of the cities with less than 23 thousand
inhabitants, Group 4 has 75% of the cities with less than 20 thousand inhabitants. As
to development, they are close in HDI indexes, Group 1 having an HDI index average
of 0.76 and Group 4 has 0.74.
Group 3 showed itself to be opposed to Group 2, presenting the highest averages for
the variables analyzed. This group may be considered as the one formed by the
biggest cities in the sample and, at the same time, being in average the most
developed.
Placing the groups in an imaginary line which measures the dimensions stated for
ranking the cities, we may say that Groups 2 and 3 are at the extremities of this
imaginary line, while Groups 1 and 4 are in intermediate positions.

Technical efficiency analysis
The descriptive statistics of technical efficiency in allocating primary care resources for
groups are set re set out in tables 3 to 6, for the four years which were analyzed
(2007-2010).
Table 3 Technical efficiency and productivity changing for Group 1
Efficiency Malmquist
Year Obs Avg Min Max 25% Median 75% Avg 25% Median 75%
2007 360 57.68 18.95 100.00 44.59 54.84 66.06 - - - -
2008 360 59.34 20.03 100.00 44.98 56.33 70.16 0,99 0,90 0,99* 1,06
2009 360 65.11 19.70 100.00 52.95 64.20 75.53 0,99 0,90 0,98* 1,05
2010 360 62.39 22.68 100.00 48.74 58.37 73.56 1,01 0,90 1,00 1,07
Obs Observations; Min Minimum; Max Maximum; Avg average
Observations: p-value<0.05 for univariate normality asymmetry and kurtosis test and bivariate and
multivariate normality of Doornik-Hansen; * significant at 5% by the nonparametric Wilcoxon test for
the theoretical value of the median equal to 1.
Source: research results.

Table 4 Technical efficiency and productivity changing for Group 2
Efficiency Malmquist
Year Obs Avg Min Max 25% Median 75% Avg 25% Median 75%
2007 255 58.05 19.51 100 43.59 54.34 68.62 - - - -
2008 255 48.07 15.77 100 31.49 42.51 60.24 1,01 0,90 0,98* 1,06
2009 255 55.93 18.67 100 41.14 51.20 65.58 1,00 0,89 1,00 1,09
2010 255 59.70 28.34 100 43.37 54.95 72.32 0,98 0,85 0,97* 1,08
Obs Observations; Min Minimum; Max Maximum; Avg - Average
Observations: p-value<0.05 for univariate normality asymmetry and kurtosis test and bivariate and
multivariate normality of Doornik-Hansen; * significant at 5% by the nonparametric Wilcoxon test for
the theoretical value of the median equal to 1.
Source: research results.






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Table 5 Technical efficiency and productivity changing for Group 3
Efficiency Productivity changing
Year Obs Avg Min Max 25% Median 75% Avg 25% Median 75%
2007 306 61.64 15.41 100 46.80 58.67 74.11 - - - -
2008 306 54.14 13.87 100 38.60 48.86 65.48 1,04 0,89 0,99 1,10
2009 306 59.53 24.22 100 42.92 54.46 74.76 1,01 0,89 0,98* 1,05
2010 306 60.06 19.64 100 43.96 56.73 72.38 0,99 0,86 0,97* 1,05
Obs Observations; Min Minimum; Max Maximum; Avg - Average
Observations: p-value<0.05 for univariate normality asymmetry and kurtosis test and bivariate and
multivariate normality of Doornik-Hansen; * significant at 5% by the nonparametric Wilcoxon test for
the theoretical value of the median equal to 1.
Source: research results.

Table 6 Technical efficiency and productivity changing for Group 4
Efficiency Productivity changing
Year Obs Avg Min Max 25% Median 75% Avg 25% Median 75%
2007 176 65.42 30.52 100.00 51.95 62.48 76.59 - - - -
2008 176 69.76 31.84 100.00 54.89 68.26 82.02 1,02 0,94 0,99 1,03
2009 176 67.33 15.63 100.00 53.36 64.31 79.73 1,03 0,96 1,01 1,05
2010 176 49.58 10.34 100.00 29.14 42.67 62.78 1,01 0,86 0,98* 1,05
Obs Observations; Min Minimum; Max Maximum; Avg Average
Observations: p-value<0.05 for univariate normality asymmetry and kurtosis test and bivariate and
multivariate normality of Doornik-Hansen; * significant at 5% by the nonparametric Wilcoxon test for
the theoretical value of the median equal to 1.
Source: research results.
It can be inferred that most of the municipalities analyzed showed lost in productivity
in resource allocation in primary care in Brazil over the years analyzed. This result can
be inferred by analyzing median of Malmquist Index of Ray and Desly (1997).
It may be possible that the reduction of this productivity is related to stabilization of
Primary Care National Policy since the early years there may be greater effort by
governments to promote policy and this effort would be reduced over the year. But it
is not possible to tell if this is the cause of most lost in productivity.
Conclusions
One of this studys main contributions was the proposal of the analytic model of
performance in primary care expenditures. Furthermore, this study took into
consideration a longitudinal analysis which is not taken into consideration in most
studies which use efficiency indexes in Brazil.
Analyzing the most similar possible cities, in four different groups, the efficiency
scores evidenced the disparities in resource allocation in the southeastern region, a
fact which could be justified by their autonomy in allocating their resources and the
absence of relative comparison procedures between them for this allocation. This
study proposes a model to solve this problem of a lack of relative comparisons. Also,
we may analyze through the quartiles that the median scores are far from technical
efficiency. There is space for increasing the primary care service offer, given the
current level of expenditures.

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As a proposal for a performance analysis, this model should be applied continuously,
so that it may be justified as a performance study. This study is the initial proposal of
a model so that the measuring is not restricted only the time period of this study. The
building of reference units, or benchmarks, may be an instrument to direct the
decision-taking of city managers, as well as other higher public management levels,
such as state and national.
References
BANKER, R.D.; CHARNES, A.; COOPER, W.W. (1984) Some models for estimating
technical and scale inefficiencies in data envelopment analysis. Management Science,
30 (9): 1078-1092.
CHARNES, A., COOPER, W.W., RHODES, E (1978) Measuring the efficiency of
decision-making units. European Journal of Operational Research, 2 (1): p. 429-444,
1978.
FERGUSON, T.D.; DEEPHOUSE, D.L.; FERGUSON, W.L (2000) Do strategic groups
differ in reputation? Strategic Management Journal, 21: 1195-1214.
FLEURY, S.S.B.; BARIS, E (2001) Reshaping health care in Latin America: a
comparative analysis of health care reform in Argentina, Brazil, and Mexico.
International Development Research Centre (IDRC), 2001
GREILING, D. (2006) Performance measurement: a remedy for increasing the
efficiency of public services? International Journal of Productivity and Performance
Management, 55 (6).
HAIR, J.F.; ANDERSON, R.E.; TATHAM, R.L.; BLACK, W.C. (2005) Multivariate Data
Analysis. New Jersey: Upper Saddle River, 2005.
MAROCO, J. (2003) Anlise estatstica. Lisboa: Slabo, 508 p.
MILLIGAN, G.W.; COOPER, M.C. (1985) An examination of procedures for
determining the number of clusters in a data set. Psychometrika, 50 (2): 159-179.
MINITRY OF HEALTH. (2008) Avaliao Econmica em Sade. Braslia: Editora MS.
2008
MINITRY OF HEALTH. (2007) Secretaria de Ateno Bsica Sade. Departamento de
Ateno Bsica. Poltica Nacional de Ateno Bsica. 4 Ed. Braslia: Ministrio da
Sade, 2007. 68p.
RAY, S.C., DESLI, E. (1997) Productivity growth, technical progress, and efficiency
change in industrialized countries: comment. The American Economic Review, 87 (5):
1033-1039.
SCOTT, W. R.; DAVIS, G. F. D. (2007) Organizations and organizing: rational,
natural, and open system perspectives. Upper Saddle River, NJ: Prentice Hall, 2007.

Proceedings of the 10
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SELDEN, S. C.; SOWA, J. E. (2004) Testing a multi-dimensional model of organizational
performance: prospects and problems. Journal of Public Administration Research and
Theory, 14 (3): 395-416.
SUGAR, C.A; JAMES, G.M. (2003) Finding the number of clusters in a dataset: an
information-theoretic approach. Journal of the American Statistical Association, 98
(463): 750-763.
WORLD BANK. (2007) Brazil: governance in Brazils Unified Health System (SUS):
raising the quality of public spending and resource management. Washington,DC:
World Bank.
WORLD HEALTH ORGANIZATION WHO. (2001) Brazil: health profile 2010.
Available at: http://www.who.int/countries/bra/en/. Accessed on: 23 MAR. 2011.

Proceedings of the 10
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27. Reconceptualizing the DEA
Bootstrap for improved
estimations in the presence of
small samples
Panagiotis D. Zervopoulos
China Center for Health Development Studies, Peking University,38 Xueyuan Rd, Beijing, China
Department of Business Administration of Food and Agricultural Enterprises, University of
Ioannina, 2 Georgiou Seferi St, Agrinio, Greece, pzervopoulos@uoi.gr
Francisco Vargas
Economics Department, Universidad de Sonora,E. de Zubeldia No. 27, Hermosillo, Sonora, Mexico,
fvargas@guaymas.uson.mx
Gang Cheng
China Center for Health Development Studies, Peking University,38 Xueyuan Rd, Beijing, China,
chenggang@bjmu.edu.cn
Abstract
This paper emphasizes the sensitivity of the Data Envelopment Analysis (DEA)
efficiency scores due to sampling variations of best-practice frontier and
dimensionality issues. Despite its non-parametric nature, it has been proven that DEA
yields consistent estimators when large sample sizes are used. A DEA Bootstrap
method is being widely applied to tackle inaccuracy of DEA estimators. The
combination of DEA and a modified Bootstrap expression enhances the statistical
properties of DEA estimators without overcoming the inherent limitations of each of
the two methods. This paper provides a non-resampling multi-parametric
methodology to deal with the sensitivity of DEA estimators when small samples are
available. A comparative analysis between the DEA Bootstrap and the new methods
estimations convergence rate shows that the new method performs better than the
DEA Bootstrap in the presence of small samples.
Keywords: Data Envelopment Analysis; Bootstrap; Small samples; Bias correction
Introduction
Data Envelopment Analysis (DEA) is a non-parametric technique that draws on linear
programming to measure relative efficiency of decision making units (DMUs). The
efficiency scores are defined against a best-practice frontier, which consists of the top-
performing DMUs of the sample under evaluation. In this context, the accuracy and
reliability of the obtained efficiency scores depend on the robustness of the frontier to
sampling variations, dimensionality issues, and noisy data. In the presence of these
uncertainties, bias is involved in the efficiency measures.

Proceedings of the 10
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Despite the deterministic nature of DEA, Banker (1993) has proven the consistency of
DEA efficiency scores under certain assumptions and when large samples are
employed. However, in the case of small samples, which is not uncommon in
economic and DEA literature, few studies deal with bias in non-parametric efficiency
measures.
A general methodology for correcting bias in DEA efficiency estimators has been
developed by Simar and Wilson (1998, 1999). The two scholars combined DEA with a
smoothed expression of Bootstrap. Simar and Wilsons approach is dominant in bias-
correcting DEA efficiency estimators as more than 875 citations in academic articles
are recorded. However, the DEA Bootstrap method inherits the virtues and the
limitations of the two underlying methods, DEA and Bootstrap, in estimating unbiased
efficiency scores.
A multi-parametric method for bias correction (MPBC) of DEA estimators is introduced
in this paper in an effort to obtain more consistent estimators compared to Simar and
Wilsons DEA Bootstrap. MPBC does not utilize the original sample DEA estimators in
order to make statistical inferences, but variations of the DEA estimators or of
aggregate efficiency indices. The MPBC method enables classification of the new
DMUs because the estimated confidence intervals of distinct DEA efficiency measures
either do not overlap or overlap to a small degree. The classification property of the
new method increases its managerial and decision making implications.
Method
Considering that DEA is not appropriate for measuring efficiency scores as a stand-
alone method in the case of small samples because it yields upward-biased results,
and also that Bootstrap has limited accuracy in approximating the true variability of
population efficiency scores when it is applied in the same context, we develop a
DEA-based bias-correction method that has particular applicability in the presence of
small samples ( 50 n < ) and complex production processes. The proposed method
(MPBC) does not draw on resampling such as Bootstrap. It rather employs truncated
random data generation processes to estimate the unknown population distribution F
from the empirical distribution

F . The scope of the new method is to estimate the


population efficiency scores
{ }
, 1,2,...,
p
p m = = by producing an estimator

F of the
population distribution F from the efficiency scores
{ }

, 1,2,...,
i
i n = = defined by
DEA. Bias-corrected efficiency scores
{ }
* *
, 1,2,...,
i
i n = =

are generated by

F in the
pursuit of
*

.
By applying DEA, for instance the BCC model (Banker et al., 1984), we obtain

i

efficiency scores
{ }
1

0 1
n
i i
i

=
for every DMU
i
. In the following analysis we presume
input orientation is applied.

Proceedings of the 10
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International Conference on DEA Brazil2012 228
Based on the efficiency scores
{ }
( )
1

n
i
i

=
= assigned to the sample DMUs, or, the
weighted efficiency scores
{ }
( )
1
n
i
i

=
=

, where

, a truncated random data


generation process T is utilized to produce a sequence of pseudo-numbers
{ }
*
1
x

=

for every DMU. Every sequence of pseudo-numbers originates from every single
efficiency score or from a combination of a selected efficiency score and the average
scores of the sample.

{ }
*
to produce 1,2,...,
o
T x

=


or
1 *
1

(1 ) to produce
1,2,..., ; 1,2,...,
n
ud ud
i i i io
i
z z n x
T
i n

=
+
= =


`

)

(1), where

{ }
* *

min ,
io i i
x x

=
In addition,

2
*
( ) ( , ) T x N se

~
and
* 2
( ) ( ( ), ( ( ) ) )
ud
i i i
T x N cv



- - ~ (2)
1
1

( ) (1 )
n
ud ud
i i i
i
z z n

=
= +

-
where
z is a user-defined score that denotes the magnitude of a single efficiency score, and
complementary of the sample mean efficiency scores, on the generation of a
trimmed random sequence of data (scores). In fact, there is inherent dependency
between the efficiency scores of the sample DMUs that is due to the comparative
assessment procedure applied through DEA.
Moreover,
*
x represents the randomly generated data, the
*
io
x

expresses selected
randomly generated replicas of the efficiency score for the -number
4
elements of the
sequence, and cv stands for the coefficient of variation which is user-defined.
The bias-corrected efficiency score for every DMU is estimated as follows
* *
( ) 1,2,..., ; 1,2,...,
i io
s x i n

= = =

(3), where s is a statistic (e.g., mean, median).


It is straightforward that the bias is expressed as

MPBC
i
i i
bias =

(4) where
*
[0,1)
i

.
The standard error of the proposed MPBC method is

1/2
1 * 2
1
[ ( )]
MPBC
i
io i
se x s

=
=

`
)

- (5)
where
1 *
1
( )
i io
s x

=
=

-
Taking into account equations (3) and (5), and also a large enough sequence size ( )
of pseudo-data so that the asymptotic normality of their distribution to be assured by

4
1,..., = where denotes a proper length for the sequence rather than
{ } { }
*
1 1


n n
f f f
i i
i i
p
= =
=

, both
f
and
f
p express fixed values.

Proceedings of the 10
th
International Conference on DEA Brazil2012 229
the Central Limit Theorem, the confidence intervals of the bias-corrected efficiency
scores are constructed using Students t distribution

* (1 /2) * (1 /2)
( 1) ( 1)
,
MPBC MPBC
a a
t se t se


+

+
(
(



(6)
we prove that
{ }
*

Pr , 1,2,..., 0
ub
i i
ob i n = =

(7)
and
{ }
1 *
1

Pr , 1,2,...,
L
ub
l i i
l
L ob i n e

=
= =


(8), where the superscript ub
stands for the upper bound of the confidence interval of the bias-corrected efficiency
scores.
Acknowledging the inherit randomness in the proposed method, all the provided
proofs or statements result from iterative procedures. In formula (8), the probability,
that is the average of L=1000 iterations, is equal to an infinitesimal value.
The inherent randomness in the proposed method is regarded as a drawback because
it is a source of instability for the obtained results when the method is applied
repeatedly. To overcome this drawback, a stabilization parameter is introduced in
the procedure that eliminates up to 99% the variation of the bias-corrected scores. The
parameter expresses the number of iterations for the formulas (1)-(6). The reported
results are average scores.
The proposed method
5
for dealing with uncertainties in DEA is expressed by the
following formula
*

( , , , , , ,var )
ex ex MPBC
f cv z n



(9)
where denotes the level of significance, cv is preferably a low-variance parameter (
1 cv < ), 0 1 z , about the interval of we have already discussed, and should be
at least equal to unity, which means that no iteration to the proposed bias-correction
procedure is applied.
In formula (9), two exogenous parameters
ex
n and var
ex
are included; they denote the
number of DMUs in the original sample and the number of input and output
variables, respectively, that are utilized to define the efficiency scores through DEA.
Based on a numerical example and on results that are tested through Monte Carlo to
eliminate randomness, the proposed method yields better estimators (
*MPBC

) for the
population efficiency scores ( ) than the DEA Bootstrap (
*Boot

) when the original


sample consists of fewer than 50 DMUs. In addition, the convergence rate of
*MPBC

s to
s increases against
*Boot

s when the number of input and output variables increases.


Results
From the dataset, we draw 18 samples, each sample consisting of 10, 30, 40, 50, 60,
and 80 DMUs. DEA efficiency estimators are computed for each of the 6 samples
when 4 (Case 1: 3 inputs & 1 output), 7 (Case 2: 5 inputs & 2 outputs), and 10 (Case
3: 7 inputs & 3 outputs) variables are employed. Additionally, DEA efficiency scores

5
The algorithm for the MPBC method has been developed in Matlab.

Proceedings of the 10
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International Conference on DEA Brazil2012 230
are calculated for the three population groups, which consist of 100 DMUs and 4
(group 1), 7 (group 2), and 10 (group 3) variables. The efficiency estimators are cross-
checked with the population efficiency scores in order to test the consistency of the
efficiency estimators and the maximum sample size, or the optimal combination of
DMUs and variables, for which the MPBC method yields improved bias-corrected
scores compared to those estimated by the smoothed Bootstrap.
The criterion for the selection of the 6 main samples (10, 30, 40, 50, 60 and 80 DMUs)
was the balance below and above the minimum size set by Chernick (2008) (n50) to
obtain consistent estimators by the Bootstrap.
The scope of this paper is to develop a method to identify consistent efficiency
estimators when small samples are available
{ } { }
*
1
1
n
n
p
i i
i
i

=
=

(10)
The efficiency estimators obtained by the proposed method (MPBC) should converge
more to the true efficiency scores of the DMUs under evaluation than the efficiency
scores estimated by the smoothed Bootstrap
* * MPBC Boot
<

(11)
In order to test the consistency of the MPBC efficiency estimators against the efficiency
estimators obtained by the smoothed Bootstrap, we compare the efficiency scores
assigned to the 6 main samples (10, 30, 40, 50, 60, and 80 DMUs) with those of the
population sample that consists of 100 DMUs.
In the case we employ a binary scale to distinguish the success from the failure of
MPBC to yield more consistent efficiency estimators than the smoothed Bootstrap, we
utilize the following criterion
1 * *
1
,
1 if Pr 0.5
Convergence
0 otherwise
n
MPBC Boot
i i i
i
i z
ob n

=

| |
` |
\ . )

< >
=


(12)
The effects of the variability of the user-defined and the exogenously-fixed
parameters, illustrated in formula (9), on the consistency of the MPBC efficiency
estimators in comparison with the smoothed Bootstrap efficiency estimators, are
summarized in the regression models (13) and (14). The construction of the former
regression model drew on efficiency convergence scores obtained for =[0, 2, 10], and
the latter regression model was based solely on scores estimated for =10.
The independent variables used in our analysis were: (1) n, (2) variables, (3) z, (4)
binz, (5) binzn, and (6) binzvariables. The parameters , cv and are regarded as
constant ( =0.05, cv =0.25, =100). The independent variable binz is a binary variable
where binz=0 if [0.0, 0.5) z , and binz=1 if [0.5, 1.0] z . The regressors binzn and
binzvariables are mixed variables.
In practice, let [0, 2, 10] = , then
** ** **
**
% (65.219) (0.456) (0.316)
(12.921)
Convergence binzn
binz
n = +

(13)
**
p <0.01, R
2
=0.448, adjR
2
=0.445, F=141.628, p
F-stat
=0.00

Proceedings of the 10
th
International Conference on DEA Brazil2012 231
If the user selects a [0.0, 0.5) z , the MPBC method yields more consistent efficiency
scores than the smoothed Bootstrap for samples with up to 33 DMUs, regardless of
the number of variables incorporated in the identification of the DEA efficiency scores.
The sample size is extended to 36 DMUs when a [0.5, 1.0] z is selected for the bias-
correction procedure.
In the case of 10 = , then
** ** **
*
% (70.899) (0.537) (0.259)
(1.047)
Convergence binzn
binzvariables
n = +
(14)
**
p<0.01,
*
p<0.05, R
2
=0.513, adjR
2
=0.505, F=68.089, p
F-stat
=0.00

For a [0.0, 0.5) z , the MPBC efficiency estimators report better convergence than the
smoothed Bootstrap efficiencies for samples with up to 38 DMUs. In the case a
[0.5, 1.0] z is decided by the user, then the maximum sample size for which the
MPBC simulates at a higher degree than the smoothed Bootstrap the true efficiency
varies according to the number of variables. For instance, for 4 variables, the
maximum sample size is 31; for 7 and 10 variables, it is 35 and 39, respectively. In all
these cases, the maximum sample size meets the criterion/rule of thumb of
{ } max * , 3*( ) n x y x y + for preventing dimensionality effects in the DEA efficiency
estimations.
Taking into account formulas (13) and (14), we develop the following roadmap to
facilitate the application of MPBC towards the optimum relative convergence of the
efficiency estimators to the true efficiency scores. In practice,
if variables

7, and
n<31 =[0, 2, 10] and
z
[0.5, 1.0]
31

38 =10 and
z
[0.0, 0.5)
if variables = 8, and
n<32 =10 and
z
[0.5, 1.0]
32

38 =10 and
z
[0.0, 0.5)
If variables = 9, and
n<36 =10 and
z
[0.5, 1.0]
36

38 =10 and
z
[0.0, 0.5)
If variables

10,

n =10 and
z
[0.5, 1.0], [max n
6
: adjusted to the number of
variables]

6
The MPBC method yields more consistent efficiency estimators than the smoothed Bootstrap, or
relative consistent efficiency estimators, and also free of dimensionality effects, for up to 43 DMUs
when 13 variables are incorporated in the DEA evaluation process.

Proceedings of the 10
th
International Conference on DEA Brazil2012 232
so that,
{ } { }
*
1
1
n
n
p
i i
i
i

=
=

, and just for case 1,


{ }
{ }
1
*
1
n
i
n
p
i
i i

=
=

where
( )
1
* *
#
i i

=

and # denotes the number of parameters.
Conclusions
In this paper, we developed a multi-parametric method for bias correction (MPBC) of
DEA efficiency estimators. The new method enhances the applicability and reliability
of DEA as a comparative efficiency measurement technique when small or inadequate
samples are available. In the presence of small or inadequate samples, DEA efficiency
estimators are not regarded as consistent because they are biased by sampling
variations and dimensionality.
In order to prevent any confusion to the users of the method resulting from the
selection of the appropriate parameters to attain greater consistency for the efficiency
estimators than the smoothed Bootstrap, we provide a detailed roadmap. Based on
this roadmap, we prove that efficiency estimators obtained by DEA in conjunction
with MPBC converge in higher probability to the true efficiency scores than the
efficiency estimators yielded by smoothed Bootstrap, under certain circumstances.
MPBC is regarded as an appropriate bias-correction method for DEA efficiency
estimators when the samples consist at maximum of 43 DMUs.
References
Banker, R. D. (1993). Maximum-Likelihood, Consistency and Data Envelopment
Analysis - a Statistical Foundation. Management Science, 39, 1265-1273.
Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating
technical and scale inefficiencies in data envelopment analysis. Management Science,
30, 1078-1092.
Chernick, M. R. (2008). Bootstrap Methods: A Guide for Practitioners and Researchers.
New Jersey: John Wiley & Sons.
Cooper, W. W., Seiford, L. M., & Tone, K. (2007). Data envelopment analysis: a
comprehensive text with models, applications, references and DEA-Solver software
(2nd ed.). New York: Springer Science + Business Media.
Simar, L., & Wilson, P. W. (1998). Sensitivity analysis of efficiency scores: How to
bootstrap in nonparametric frontier models. Management Science, 44, 49-61.
Simar, L., & Wilson, P. W. (1999). Estimating and bootstrapping Malmquist indices.
European Journal of Operational Research, 115, 459-471.


Proceedings of the 10
th
International Conference on DEA Brazil2012 233
28. Relative balance as a
complementary measure to
relative efficiency
Heinz Ahn
Technische Universitt Braunschweig, Institute of Management Control and Business Accounting,
Germany, hw.ahn@tu-bs.de
Ludmila Neumann
Technische Universitt Braunschweig, Institute of Management Control and Business Accounting,
Germany, l.neumann@tu-bs.de
Nadia Vazquez Novoa
Technische Universitt Braunschweig, Institute of Management Control and Business Accounting,
Germany, n.vazquez-novoa@tu-bs.de
Abstract
One of the major strengths of Data Envelopment Analysis (DEA) is the endogenous
determination of the weights of performance criteria, assigning to each decision
making unit (DMU) its best possible efficiency score. However, this property also
leads to a significant shortcoming: it allows zero-value weights that exclude criteria
from the evaluation. While many approaches that deal with this problem incorporate
value judgments into analysis, our approach supports managements efficiency
analysis with a complementary performance measure that is derived from the given
data set. The respective balance score evaluates the extent to which a DMU avoids
concentration on only some of the crucial performance criteria. One of the possible
decisions resulting from a balance analysis is to reduce the set of DMUs considered to
serve as benchmarks. For this case, a modified CCR-O model is presented.
Keywords: DEA, Balance score, Inappropriate benchmarks
Introduction
Data Envelopment Analysis (DEA) is a meaningful approach to relative efficiency
measurement of decision-making units (DMUs) that assesses DMUs performance by
aggregating their input and output values into a single efficiency score. The weights of
these performance criteria are endogenously determined, assigning to each DMU its
best possible efficiency score. This property constitutes one of the major advantages
of the basic DEA models but it also represents a source of pitfalls concerning
performance assessment and performance control. Such problems result from the
possibility of zero-value weights that eliminate from the analysis any input and/or
output criteria in which the performance of a DMU is weak, with the aim of raising its
efficiency score to its maximum level (Dyson and Thanassoulis, 1988; Allen et al.,
1997; Thanassoulis et al., 2004). Unlike approaches that deal with this issue by

Proceedings of the 10
th
International Conference on DEA Brazil2012 234
incorporating value judgments into the usual DEA analysis, we suggest a
complementary balance score that directly refers to the given input/output values.
The balance score constitutes a source of additional information about a DMUs
performance structure. As is known, it may happen that different DMUs obtain
(nearly) the same efficiency score even if they substantially differ in their pattern of
criteria achievement. We suggest to cover this aspect of performance by means of the
balance score
o
. A DMU will be characterized by a balance score of 100% if all of its
crucial performance criteria values are relative to the respective values of the other
DMUs achieved on a similar level. In contrast, the more the performance criteria
values are not achieved on a (relative) similar level, the more the balance score
decreases towards 0%.
Often, outputs can be interpreted as indicators of strategic goals and inputs as means
to achieve these goals. For such cases, the pattern of the input values is estimated to
be of minor relevance, whereas the pattern of output values is estimated to be of great
managerial importance. For this reason, managers may prefer to focus their attention
on the evaluation of the balance of the output mix. We therefore focus on an output-
oriented balance score. If the analysis of the input mix would be of main interest, an
input-oriented balance score could be calculated.
The rest of the paper addresses the following aspects: introduction of the balance
model; benefit of the model application; numerical example and concluding remarks.
The Balance Model
According to Ahn et al. (2012) the procedure to measure relative balance is comprised
of two main steps: determination of the acceptable output mix region and calculation
of each DMUs balance score. Supposing that there is no ideal output pattern or that it
is at least unknown, we use the average of all DMUs as substitute and the average
absolute deviation from the mean as basis for the specification of a tolerance region,
called the multicone C .
While all DMUs located inside this region are considered to be balanced, the balance
score for all other DMUs needs to be calculated. A reference point on the boundary of
the multicone is determined for each unbalanced DMU guaranteeing that the
maximum relative variation
o,r
of each output r necessary to obtain a balanced output
mix is minimal. The formula 1
o
reflects to what extent the extreme pattern of the
output values of an unbalanced DMU differs from that of the reference point.
Balance analysis and its consequences
The complementary information provided by the balance analysis provides insights
that substantially influence the DEA efficiency analysis.
Concerning performance assessment, the balance score can be characterized as a kind
of secondary measure. On one hand, efficiency deficits cannot be compensated by a
high balance score. On the other hand, balance deficits let the performance expressed
by a high efficiency score appear in another light. For example, it may be found that
the cause of a DMUs low balance score is the pursuit of a significantly different

Proceedings of the 10
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International Conference on DEA Brazil2012 235
business strategy. Consequently, such DMUs should be excluded from the set of
comparable DMUs.
Concerning performance control, the management should be cautious about using
efficient but unbalanced DMUs as benchmarks. An inefficient DMU with such a
benchmark would be urged to pursue a questionable performance strategy.
We suggest excluding efficient but unbalanced DMUs from the set of possible
benchmarks. This can be achieved by adding the following constraint to the
envelopment form of the CCR-O model:
{ } n k o k
k k o
,..., 1 , 1 , 0
,
=

This modification still allows all efficient DMUs to serve as their own benchmarks,
while eliminating unbalanced DMUs from the efficiency frontier relevant for the
inefficient DMUs. Consequently, the reference sets of the inefficient DMUs only
contain balanced DMUs, and the modified efficiency frontier leads to improvements of
the efficiency scores of inefficient DMUs. These improvements result from the fact that
extreme targets set by the unbalanced benchmarks are replaced with more moderate
targets. In special cases, it may even happen that an inefficient DMU turns into an
efficient one because it becomes part of the new frontier.
The numerical example that follows in the next section illustrates the proposed
balance analysis and shows the evolution in the results.
Numerical example
We refer to the example of a European pharmacy chain originally presented in Ahn et
al. (2012). As Table 1 shows, 20 pharmacy stores were analyzed, based on two inputs:
worked hours (WH) and store square meters (SQM) and three outputs: number of
customers buying medications available only on prescription (MP), number of
customers purchasing over the counter products (OTC) and total number of
prescriptions (PR). The outputs represent the main goals to be pursued by the stores.
The main numerical results calculated by running the balance model are presented in
Table 1. The DMUs A, E, F, O, Q, R, and T are not attain all outputs in an acceptable
proportion. For example, DMU A has a balance score
A
of 0.88 since it requires a
minimal output variation of 12% to be projected onto C ; an increase of 11% on MP
and 12% on PR is necessary, while a reduction of 12% on OTC is allowed.
In the extreme case, where at least one output is not produced at all, the respective
DMU will be characterized by a balance score of 0. The DMU R represents such an
extreme DMU because it has no OTC sales. The
o,r
values project R (nearly) onto the
origin of the coordinate system, which obviously cannot be understood as a
benchmark. However, the efficiency analysis by means of traditional CCR-O model
designates R as a benchmark for F and K (see Table 2), although Table 1 shows that R
is specialized on two outputs, while F and K also take a third output into account. For
this reason we reanalyze the efficiency of the pharmacy stores by means of a modified
CCR-O model which exclude unbalanced DMUs from the reference set of other
DMUs. Table 2 presents the results of the modified CCR-O model and those of the
traditional CCR-O model.

Proceedings of the 10
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Table 1. Data set of 20 pharmacy stores and the results of the balance model.
DMU
Inputs Outputs Balance model (iteration 1)
WH SQM MP OTC PR
o

o,MP

o,OTC

o,PR

A 7,424 287 3,578 12,329 15,431 0.88 0.11 0.12 0.12
B 14,208 168 9,115 8,765 40,034 1 0 0 0
C 8,608 146 7,644 13,340 29,453 1 0 0 0
D 8,736 281 7,866 13,055 27,304 1 0 0 0
E 10,656 333 12,244 9,307 56,743 0.89 0.11 0.11 0.07
F 10,272 130 8,700 10,067 52,510 0.99 0 0.01 0.01
G 10,336 274 6,749 14,279 30,522 1 0 0 0
H 12,160 240 8,867 13,446 41,789 1 0 0 0
I 7,424 203 10,483 12,580 52,145 1 0 0 0
J 12,960 264 8,981 13,787 36,094 1 0 0 0
K 10,880 257 7,000 13,071 39,464 1 0 0 0
L 6,240 220 7,946 10,826 43,239 1 0 0 0
M 14,240 127 15,335 24,899 68,108 1 0 0 0
N 11,584 115 13,133 27,643 60,306 1 0 0 0
O 3,840 92 5,365 12,365 16,079 0.90 0 0.10 0.10
P 9,600 266 8,119 12,908 43,039 1 0 0 0
Q 6,400 90 7,108 24,107 35,996 0.89 0.11 0.11 0.06
R 7,040 92 7,567
1
44,104 0
2
1 + 0.57
2
1 +
S 10,176 275 8,115 12,854 26,959 1 0 0 0
T 7,040 180 2,835 11,980 18,333 0.79 0.21 0.21 0.11

The balance and efficiency analysis concerning a period 1 is represented by the results
of iteration 1. The six pharmacy stores originally identified as efficient keep this
property. While the balanced DMUs I, M and N also continue to serve as benchmarks
for other stores, the unbalanced DMUs O, Q and R are eliminated from the reference
set of other stores. This increases the efficiency score of those inefficient stores which
formerly had unbalanced DMUs in their reference sets. For example, the new
benchmark of A is N, raising its efficiency score from 0.44 to 0.70. As a special case, L
is now characterized as efficient, and it becomes an appropriate benchmark for K and
P. It should be noted that the balance analysis indicates R as a DMU following a
different business strategy. In this case, R is not comparable to the other DMUs and
should be excluded from the sample.
On the basis of the data analysis of period 1, the management of the pharmacy stores
should take decisions according to the respective results. If a store is unbalanced, a
change of its output mix in reference to the determined reference point on the frontier
of the multicone is required. Hence, the DMUs A, E, F, O, Q and T should adjust their
output values according to the proposed
o,r
values in Table 1. Such changes in the
output mix may induce a negative change in the efficiency score in the subsequent
period 2 indicating the overestimation of the actual performance of the DMUs.

Proceedings of the 10
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Table 2. Traditional versus modified efficiency scores and benchmarks.
DMU
CCR-O model
Modified CCR-O
model (iteration 1)

Modified CCR-O model
(iteration 2)
o


o


o


A 0.44 Q 0.70 N 0.61 N
B 0.55 I, N, O 0.55 I, N 0.55 I, N
C 0.70 I, N, O 0.72 I, N 0.72 I, N
D 0.64 I, O 0.72 I, N 0.72 I, N
E 0.81 I 0.81 I 0.72 I
F 0.86 N, Q, R 0.93 I, N 0.92 I, N
G 0.50 I, O, Q 0.58 N 0.58 N
H 0.56 I, N, O 0.57 I, N 0.57 I, N
I 1 I 1 I 1 I
J 0.53 I, N, O 0.54 I, N 0.54 I, N
K 0.55 I, Q, R 0.59 I, L, N 0.59 I, L, N
L 0.99 I, Q 1 L 1 L
M 1 M 1 M 1 M
N 1 N 1 N 1 N
O 1 O 1 O 1 O
P 0.66 I, Q 0.70 I, L, N 0.70 I, L, N
Q 1 Q 1 Q 1 Q
R 1 R 1 R --- ---
S 0.57 I, O 0.62 I, N 0.62 I, N
T 0.46 I, Q 0.71 N 0.56 N


Assuming that the balanced DMUs keep their balanced output mix, the pharmacy
stores are again evaluated in period 2, but without the incomparable DMU R. The
results of this second balance analysis are shown in Table 2, iteration 2. The DMUs A
(
A
=0.99), E (
E
=0.97), F (
F
=0.97), Q (
Q
=0.99), and T (
T
=0.99) still remain
unbalanced, while DMU O becomes balanced and the balance score of DMU B
decreases to 0.97. The efficiency analysis by running the modified CCR-O model
shows a decrease of the efficiency scores of unbalanced DMUs while the efficiency
scores of balanced DMUs as well as the reference set of inefficient DMUs remain
unaffected.
This iterative process of balance and efficiency analysis could be continued. Assuming
that the output mix of balanced DMUs remains constant, the unbalanced DMUs will
turn into balanced ones after further iterations will be conducted.


Proceedings of the 10
th
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Conclusions
This paper introduces a units-invariant model for identifying DMUs with an
unbalanced output mix and illustrates the method with a numerical example. Our
approach supports managements efficiency analysis with a complementary
performance measure that avoids setting restrictions on the weights. Based on a
typical data set for a DEA application, it allows for higher discrimination within both
efficient and inefficient DMUs by quantifying their relative balance. The approach
does not need additional value judgments to quantify the balance scores and bears no
risk of infeasible solutions.
A thorough evaluation of the achieved balance scores provides insights that
substantially influence the DEA efficiency analysis. Concerning performance
assessment, the explanation for a DMUs low balance score could be that the DMU
pursues a different business strategy and therefore is not comparable to the other
DMUs. Concerning performance control, the management may agree that efficient but
unbalanced DMUs are not adequate benchmarks for inefficient DMUs. For this case, a
modified CCR-O model is proposed, which endogenously calculates the balance score
and eliminates the undesirable benchmarks. In addition, an iterative process of
balance and efficiency analysis is suggested, which determines adequate efficiency
scores and supports the unbalanced DMUs on their way to get balanced.
A series of alternative models can be developed by modification of the procedure to
calculate o (Dyckhoff et al., 2012). For example, instead of using the average
deviation as a measure of dispersion the less restrictive standard deviation could be
used. This would lead to a broader multicone
C
. Nevertheless, this alternative
multicone would keep the feature of being sensitive to the distribution of the DMUs,
changing its position and amplitude according to the output values of the DMUs.
References
Ahn H., L. Neumann, N. Vazquez Novoa (2012) Measuring the relative balance of
DMUs. European Journal of Operational Research 221: 417-423.
Allen R., A. Athanassopoulos, R.G. Dyson, E. Thanassoulis (1997) Weights restrictions
and value judgments in Data Envelopment Analysis: Evolution, development and
future directions, Annals of Operations Research 73: 13-34.
Dyckhoff, H., A. Dirksen, E. Mbock (2012) Measuring balanced efficiency with DEA:
New approach and case study of German business schools research performance,
http://ssrn.com/abstract=1990233.
Dyson R.G., E. Thanassoulis (1988) Reducing weight flexibility in Data Envelopment
Analysis, Journal of the Operational Research Society 39: 563-576.
Thanassoulis E., M.C.S. Portela, R. Allen (2004) Incorporating value judgments in DEA.
In Cooper, W.W., L.M. Seiford, J. Zhu (eds.), Handbook on Data Envelopment
Analysis. Boston et al.
Acknowledgements
We gratefully acknowledge the financial support of the DFG (German Research
Foundation) in the context of the research project Advanced Data Envelopment
Analysis.

Proceedings of the 10
th
International Conference on DEA Brazil2012 239
29. Statistical Inference and
Efficient Portfolio Investment
Performance
Shibo Liu
Loughborough University UK, S.Liu2@lboro.ac.uk
Tom Weyman-Jones
Loughborough University UK, T.G.Weyman-jones@lboro.ac.uk
Karligash Glass
Loughborough University UK, K.A.Kenjegalieva@lboro.ac.uk
Abstract
The purpose of this paper is to apply a quadratic data envelopment analysis model
with bootstrap and second stage regression to estimate the efficiency of a sample of
investment funds, obtain the statistical inference of the efficiency scores and detect the
determinants of inefficiency. Morey and Morey (1999) developed a mutual funds
efficiency measure in a traditional mean-variance model. It is derived from the
standard data envelopment analysis but differs from it in having non-linear constraints
in the envelopment version of the models structure. This paper first applies the
procedures in Morey and Morey (1999) to a new modern data set comprising a multi-
year sample of investment funds and then utilise Simar-Wilson (2008) bootstrapping
algorithms to develop statistical inference and confidence intervals for the indexes of
efficient investment fund performance. For the second stage analysis, robust-OLS
regression, Tobit models and Papke-Wooldridge (PW) models are conducted and
compared to evaluate contextual variables affecting the performance of investment
funds. The DEA efficiency scores are regressed on potential variables to test the
statistical significance of those factors. Results and inferences are drawn from an
extensive new dataset of investment funds.
Keywords: nonlinear-DEA, portfolios, bootstrapping, second stage DEA
Introduction
The history of portfolio evaluation dates from the 1960th (Sharp, 1966; Treynor, 1965
and Jensen, 1968), with emphasis on both expected return and risk. Investment fund
managers attempt to find efficient portfolios those promising the greatest expected
return for any given degree of risk, i.e. risk-adjusted return. However, there are many
criticisms of traditional portfolio analysis which focus on their sensitivity to chosen
benchmarks. Murthi et at. (1997) were the first to apply DEA methodology to fund
performance evaluation. A large proportion of DEA models applied to investment
funds show piecewise linear correspondence between multiple inputs and outputs.

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However, according to Markowitz portfolio theory, there is correlation between
different assets which should not be ignored, and these co-movements between
different securities affect the relationship between expected return and risk of the
combined portfolio.
Based on the unique characteristics of investment trusts, Morey and Morey (1999)
developed an investment funds efficiency measure in a traditional mean-variance
model. It was based on Markowitz portfolio theory and related the non-parametric
methodologies to the foundations of traditional performance measurement in mean-
variance space. The model is derived from the standard data envelopment analysis but
differs from it in having non-linear constraints in the envelopment version of the
models structure. Although mean and variance are considered in Morey and Morey
(1999) models, they distinguish their model from traditional portfolio analysis by the
fact that there is no theoretical benchmark like the market portfolio of the Capital
Asset Pricing Model. Instead, the benchmarking fund in Morey and Morey (1999)
consists of certain funds in the group, each with a particular weight. So rather than
being compared with an idealised fund, Morey and Morey (1999) model benchmarks
the funds under evaluation again themselves. This makes Morey and Morey (1999)
model practically feasible and easier to test.
Therefore, this paper firstly applies the procedures in Morey and Morey (1999) to a
new modern data set comprising a multi-year sample of investment funds. It then
extends Morey and Morey (1999) model by adding statistical significance tests. The
motivation is that the DEA efficiency scores obtained through Morey and Morey (1999)
model have not hitherto been tested for statistical significance. Simar-Wilson (2008)
bootstrapping algorithms are utilised to develop statistical inference and confidence
intervals for the indexes of efficient investment fund performance.
After conducting the statistical test, this paper then examines the efficiency of
investment trusts, analyse the factors contributing to investment trusts performance
and detect the determinants of inefficiency. This framework involves two-stages. In
the first stage, efficiency scores are calculated using Morey and Morey (1999) quadratic
DEA model. And then in the second stage, these scores are regressed on potential
explanatory variables which may have an impact on the funds performances. Robust-
OLS regression, Tobit models and Papke-Wooldridge (PW) models are conducted and
compared to evaluate contextual variables affecting the performance of investment
funds. In this stage the DEA efficiency scores are regressed on potential variables
including Sharpe ratio, Jensens alpha, expense ratio, P/E ratio, book to market ratio
and market value of the investment funds to test the statistical significance of those
factors.
Methods
In the essence of data envelopment analysis, Morey and Morey (1999) quadratic
models use the idea of funds of funds: for each fund there is a corresponding
composite benchmarking fund, which lies on the efficient frontier. These are
hypothetical but potentially efficient combinations of the actual observations. DEA
scores are obtained by measuring the direct distance from the position of the fund in
question in mean-variance space to that of the efficient composite benchmarking fund.

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Morey and Morey (1999) presented two basic quadratic programming approaches to
identify those funds that are efficient. These two approaches are mean return
augmentation and risk contraction. Figure1 illustrate these two quadratic models.
From Figure 1, it is in the mean-variance space with risk as input and mean return as
output. These two approaches show different paths to the efficiency frontier.


Mean return augmentation method could be seen as output oriented DEA, and it
represents a vertical path towards the efficient frontier, while the risk contraction
model is input-oriented DEA which follows the horizontal path.
Consider N mutual funds to be evaluated, indexed j=1, 2,,N, where
0
j is the fund in
evaluation for each run. , ,... 2 , 1
0
N j = and there are N runs totally. Let T denote the
number of different time horizons, where t=1, 2,,T. Denote ) (
,t j
R E as the mean
return for fund j, and
2
j
as its the variance as well as ) , (
, , t j t i
R R Cov as its covariance.
Denote
j
w as the weight allocated to each fund to form the benchmarking fund in
each run. Formula of mean return augmentation is as follows:
Determine ) ,..., ,... 2 , 1 ( 0
0
N j j w
j
= so that:
) ,... 2 , 1 (
) ( ) (
) , (
1 . .
,
1
,
2
, ,
1 1 1
2
,
2
1
0
0
T t
R E R E w
R R Cov w w w
w t s
Max
t j
N
j
t j j
j t j t i
N
j
N
j i
i
N
j
j i t j j
N
j
j
=

+
=

=
=
+
= =
=

Where is the efficiency score and we have 1


.
is calculated by running the above programming problem once for each fund.
Efficient funds will have a value of one, while inefficient ones will get a value greater
than one which shows how much the actual return should be expanded for the fund
to be considered technically efficient.
The second quadratic program is risk contraction, and the formula is as follows:
Mean
Return
O
Graph 1
Inefficien
t Fund
Mean
Return
Augmentatio
n
Risk
Contractio

Risk

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) ,... 2 , 1 (
) , (
) ( ) (
1 . .
2
, ,
1 1 1
2
,
2
,
1
,
1
0
0
T t
Z R R Cov w w w
R E R E w
w t s
Z Min
j t j t i
N
j
N
j i
i
N
j
j i t j j
t j
N
j
t j j
N
j
j
=
+

=
+
= =
=
=

Where 1 Z and the efficient frontier is composed
by funds with Z equal to one.
Results and discussions
29 funds classified by Morningstar as UK equity Mid/Small cap are tested and the
results show that both mean return augmentation and risk contraction approach
identify the same 6 efficient funds and except the efficient funds, 3 funds out of 29
have the same ranking from both approaches, with other funds rank differently for
different approaches. The correlation between two rankings is 0.829929, which is very
high. This means that although mean return augmentation approach and risk
contraction approach emphasize different aspects and have different benchmarking
fund on the efficient frontier, a fund could get similar ranking based on two
approaches. Also, the marginal contribution of the mean return and variance in each
period to the funds efficiency could be obtained by solving lagrangian functions.
Then DEA scores are bootstrapped with 2000 replicates and Bandwidth h equals
0.2186 which is calculated by least-squares cross-validation method described by
Silverman (1986). From the results, the initial DEA model gives an average
uncorrected efficiency score of 1.2470, while the bootstrap model generates an
average bias-corrected score of 1.2642. The minimum uncorrected score is 1 and the
maximum is 1.9331, while the minimum bias corrected score was 1 and the maximum
was 1.9736. For the most efficient funds, the 2000 bootstrap estimators are all equal to
one; therefore the 95% confidence intervals for these funds become a single point.
The results also reveal that all the estimated biases are negative, which is as expected,
because according to Simar and Wilson (1998), the DEA estimate is upwardly biased
using an input oriented model and downwardly biased for an output oriented model.
The original scores have a mean bias of -0.0172. And the standard deviations for all
the estimators are quite small with the maximum standard deviation equal to 0.0908.
All the funds satisfy the condition of
4
1

>
i
i
bias

, except for the most efficient funds


which have both the bias and the standard deviation equal to zero. From the results,
all of the original DEA scores are within the lower and upper bounds of 95%
confidence interval, with the maximum range is as small as 0.3343. Therefore the
statistical test indicates that the DEA scores are reliable. This conclusion can be further
proved by the comparison between rankings of the funds from original DEA scores
and rankings based on bias-corrected DEA scores, which shows that except two
funds, all the other funds have exactly the same rankings before and after bias
correction; for the two funds which have difficult rankings, their rankings using
original DEA scores and bias corrected DEA scores are very close.

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Robust-OLS, two limit tobit, one limit model censoring at zero and PW model with
logit function as the link function are conducted and the results indicate that firstly,
Shape ratio and price/earnings ratio have positive impact on the fund performance
under Robust-OLS and three tobit models, but not statistically significant, while
Jensens alpha, net expense ratio, market value, and book to market ratio of the fund
have negative impact on the fund performance, but only Jensens alpha is statistically
significant in three tobit models. Secondly, the magnitude of all the factors are fairly
close for OLS and Two limit and One limit tobit models, and PW model with the same
sign, while the results from tobit model censoring at zero has the opposite sign and
different magnitude. This is because in tobit model censoring at zero, the dependent
variable is obtained by taking the reciprocal of DEA score minus one, therefore the
positive relation between DEA scores and the dependent variable in other regressions
turn to negative in this model. The p values of the marginal effects from PW model
are much larger than other models except of the last factor book to market ratio,
where tobit model censoring at zero has slightly larger p value.
For all the factors except the Jensens alpha in tobit models, the p-values are all larger
than the critical value 0.05 for 95% confidence level. There could be misspecification
or inclusion of irrelevant variables. Also because Sharpe ratio and Jensens alpha are
two measurements that also in mean and variance space, a recursive model is applied
which regresses DEA scores, Sharpe Ratio and Jensens Alpha on net expense ratio,
price/earnings ratio, market value and book to market ratio respectively using robust-
OLS and indicates them as model (1), model (2) and model (3) respectively. The
results of model (1) indicates that the net expense ratio has a negative impact on the
efficiency score indicated by the DEA score as expected, but not statistically
significant, with PE ratio, Market value and book to market ratio impact the efficiency
score positively, but only the coefficient of the PE ratio is statistically significant.
Model (2) gives very good results, in a way that all the coefficients are statistically
significant. In model (2), the PE ratio, market value, book to market ratio make
significant positive contribution to explaining the efficiency indicated by Sharpe ratio.
From model (3), all the factors have a positive impact on the efficiency measure
indicated by Jensens Alpha, but none of the coefficients are statistically significant.
Also, model (2) shows the highest R-square among those three models, which equals
0.7914 while the R-square in Model (1) is 0.5438.This means that both models fit well.
The prob>F gives the overall significance level of the regression model. Model (1) has
the smallest prob>F value, which equals 0.0006; while that in model (2) is slightly
higher, but still highly significant at 1% significance level. The results imply that
quadratic DEA score is better than Jensens Alpha and similar to Sharpe ratio as an
investment fund efficiency indicator.
Conclusions
The purpose of this paper is to apply a quadratic data envelopment analysis model
with bootstrap and second stage regression to estimate the efficiency of a sample of
investment trusts, obtain the statistical inference of the efficiency scores and detect the
determinants of inefficiency.

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Firstly the relative rankings of 29 funds are obtained applying Morey and Morey
(1999) quadratic DEA model, the marginal contribution of the mean return and
variance in each period to the funds efficiency are obtained then the Simar-Wilson
(2008) bootstrapping algorithms are utilized to develop statistical inference and
confidence intervals for the indexes of efficient investment fund performance.
Algorithms of smoothed bootstrap for this quadratic DEA model are designed. The
results indicate that the DEA scores obtained from Morey and Morey (1999) quadratic
DEA model are reliable. The third application in this paper applies second stage DEA
models to analyse the factors contributing to investment trusts performance. Robust-
OLS regression, Tobit models and Papke-Wooldridge (PW) models are conducted and
compared to evaluate contextual variables affecting the performance of investment
funds. The DEA scores are regressed on potential explanatory variables including
Sharpe ratio, Jensens alpha, expense ratio, P/E ratio, book to market ratio and market
value of the investment funds to test the statistical significance of those factors. Then a
recursive model is applied when DEA scores, Sharpe ratio and Jensens alpha are used
as dependent variables respectively while net expense ratio, PE ratio, market value
and book to market ratio are explaining factors in all three regressions. The results
show that quadratic DEA score is better than Jensens Alpha and similar to Sharpe
ratio as an investment fund efficiency indicator. Quadratic DEA score has richest set of
theoretical properties and informative estimated multipliers.
There are further developments on quadratic and cubic DEA models based on Morey
and Morey (1999). However, relevant empirical papers applying these methods are
few. For example, Briec et al. (2004) applied a directional distance function which
allowed simultaneous changes in the direction of reducing inputs and expanding
outputs. They also defined an indirect mean-variance utility function, and divided
overall efficiency (OE) into allocative efficiency (AE), and portfolio efficiency (PE).
Briec et al. (2007) claimed that portfolio returns are generally not normally distributed,
with investors preferring positive skewness so that the probability of obtaining a
negative return is low. They extended the work of Briec et al. (2004) into mean-
variance-skewness space using cubic programming and divided overall efficiency into
portfolio efficiency, allocative efficiency, and convexity efficiency. Kerstenset al. (2010)
examined different returns to scale, convexity problems and higher order moments in
both quadratic and cubic optimization programming and decided that various return
to scale (VRS), free disposal hull and higher moments are essential methodologies for
mutual funds evaluation. Also, and none of these papers discuss the statistical
properties of DEA estimators. These issues are left for future research.
References
Ayoe, H. (2007). Second stage DEA: Comparison of approaches for modelling the DEA
score. European Journal of Operational Research, 181(1), 425-435.
Banker, R. D., & Natarajan, R. (2008). Evaluating contextual variables affecting
productivity using data envelopment analysis. Operations Research, 56(1), 48-58.
Morey, M. R., & Morey, R. C. (1999) Mutual fund performance appraisals: A multi-
horizon perspective with endogenous benchmarking. Omega, 27(2), 241-258.
Simar, L., & Wilson, P. W. (1998) Sensitivity analysis of efficiency scores: How to
bootstrap in nonparametric frontier models. Management Science, 44(1), 49-61.


Proceedings of the 10
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30. Study of technical efficiency in
product development in steel
company, with application of
Data Envelopment Analysis
(DEA)
Regina Rocha de Morais Gonalves
FPL-MG, reginarmg@gmail.com
Jos Edson Lara,
FPL-MG, jedson2010@hotmail.com
Ana Lcia Miranda Lopes,
UFMG, analopes.ufmg@gmail.com
Ronaldo Lamounier Locatelli
FPL-MG, ronaldo.locatelli@yahoo.com.br
Abstract
This study applied the Data Envelopment Analysis (DEA) methodology in Brazilian
Steel Industry. The DEA is based on non-parametric mathematical models. It evaluates
the performance of each unit of observation with a multidimensional perspective. The
study used a portfolio of 12 product development projects for which were obtained
the scores of technical and scale efficiency. The technical efficiency scores indicated
the benchmark projects, demonstrating the potential of DEA. For purposes of analysis,
this research used the Data Envelopment Analysis with BCC (Banker, Charnes,
Cooper) input-oriented model; content analysis and the NTCR model (News,
Technology, Complexity and Rhythm). It can be concluded that the adoption of
methodologies aimed at efficiency projects management is an essential tool for
competitiveness of the organization, motivating employees, improving management
processes and reducing time for product delivery.
Keywords: Data Envelopment Analysis (DEA); BCC, innovation and product
development management; Multifunctional Integration; steel industry; technical
efficiency; scale efficiency.
Introduction
In the current scenario of business in the industry stands out the capacity for
innovation management and product development as a determinant of survival of
organizations. Researchers and practitioners in this area have provided significant
contributions of management systems and integrated processes, creating and

Proceedings of the 10
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validating models, as a contribution to the companies in order to meet the needs of
their customers efficiently and effectively.
The presented situation creates interdependence between the areas of organization.
They require information and cooperation between actors from different functional
departments such as Marketing, Product Development, Research and Development (R
& D), Production and Quality, and a constant interaction with the customer, in order
to obtain convergence to the company's strategic objectives.

This context brings solution for the industry like a management new products and
process development. However, as Rozenfeld et al. (2006) pointed out the
organization's success in developing new products is not guaranteed by the genius
and creativity of professional R & D, or the number of resources allocated to the
projects.
Clark e Wheelwright (1993) shows that one the practice essential in this discussion, it
is the importance of creating a development product framework that brings a broad
perspective to the process and facilitates cross-functional integration.
Shenhar and Dvir (2010) identified five dimensions of project success: project
efficiency, impact on the customer; impact team, and direct sales success and
preparation for the future.
In this context this research applied the Data Envelopment Analysis (DEA) in product
development of a Brazilian Steel Industry in order to: measure the technical efficiency;
identify the benchmark projects and measure the scale efficiency. The analysis
concentrated on a portfolio of 12 product development projects, and the scores of
technical and scale efficiency were calculated. The technical efficiency scores
indicated the projects "benchmarks", providing the capability of the method. It can be
concluded that the adoption of methodologies aimed at efficiency management
project is an indispensable tool for the competitiveness of the organization.
Methods
Regarding methodological aspects, it is a case study with qualitative and quantitative
approach. Scripts were used for semi-structured interviews for data collection.
The study used a portfolio of 12 product development projects for which were
obtained the scores of technical and scale efficiency. The technical efficiency scores
indicated the benchmark projects.
For purposes of analysis, the three techniques were applied:
Data Envelopment Analysis (DEA) with BCC (Banker, Charnes, Cooper) input-
oriented model VRS (Variable Returns to Scale);
Content analysis;
Model NTCR (News, Technology, Complexity and Rhythm).
The software selected to perform the method of this research was the DEA Frontier,
and it is available at www.deafrontier.com.


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Results and discussions
The results and discussions were aggregated into two topics: the application of Data
Envelopment Analysis (DEA) and the analysis of research results.
Application of Data Envelopment Analysis (DEA)
As the guidelines available for the use of DEA Frontier software were elected input
and output variables, as it follows: duration and cost of the project performed (inputs)
and the number of products delivered and opportunities -Tons Sold (outputs).
Table 11 presents the data used to calculate the technical efficiency and scale of
projects, as well as to identify which are the benchmark projects of the portfolio
analyzed.

Table 11- Project Portfolio of New Product Development

Source: Steel Industry

As shown in Table 12, technical efficiency scores of each analyzed project were
obtained. It was identified two efficient DMUs, 1 and 11, because they have reached
the maximum value equal to 1. Therefore, these are the benchmarks DMUs, and the
others can be considered inefficient.




Program DMU Product Projects
Duration of
Project Cost (R$)
Number of
Products
Delivered
Opportunities
(Tons Sold))
1
Naval 1,2,3,4,5,6 Project_Naval 1 180 473650 6 15000
2
Naval 7,8,9 Project_Naval 2 180 473650 3 9000
3
Naval 10 Project_Naval 3 242 622450 1 8000
4
Tubo 1 Project_Tubo 1 395 736000 1 0
5
Tubo 2 Project_Tubo 2 395 736000 1 5000
6
Tubo 3 Project_Tubo 3 395 736000 1 7000
7
Tubo 4 Project_Tubo 4 395 736000 1 7000
8
Estrutural 1 Project_Estrutural 1 152 298600 1 8000
9
Estrutural 2 Project_Estrutural 2 152 298600 1 8500
10
Estrutural 3 Project_Estrutural 3 181 350800 1 7800
11
Estrutural 4 Project_Estrutural 4 120 241000 1 7850
12
Estrutural 5, 6 Projeto_Estrutural 5 183 354400 2 6000
E
s
t
r
u
t
u
r
a
l
Product Development - TMCP Input Output
N
a
v
a
l
T
u
b
e
s

(
O
i
l

a
n
d

G
a
s
)

Proceedings of the 10
th
International Conference on DEA Brazil2012 248
Table 12- BCC Model Execution

Source: Execution from DEA-Fontier

The investigation carried out with BCC Model oriented input indicated the DMU's 2, 3,
4, 5, 6, 7, 8, 9, 10 and 12 as inefficient. Although as Table 2 shows each one has a
different degree of inefficiency.

According to the analysis of Table 3, it can be identified that two DMUs had the
maximum efficiency achieved with CCR Model, since they reached the maximum
value possible equal to 1. They were Projects 1 and 11, belonging to the Program
Project Naval and Structural respectively. It is noteworthy that the Projects 1 and 11
also obtained maximum technical efficiency model for BCC, which brings us to prove
that every project efficiently in CCR model will also be in the BCC model, FERREIRA e
GOMES, (2009). However, the DMU efficiency in BCC model cant is efficient in CCR
model.

After the technical efficiencies are calculated in BCC and CCR models, it is followed
by the calculation of the efficiency scale, and the results are presented in Table 4.


Inputs Outputs
Duration of Project Number of Products Delivered
Cost (R$) Opportunities (Tons Sold)
Input-Oriented
VRS Optimal Lambdas
DMU No. DMU Name Efficiency with Benchmarks
1 Project_Naval 1 1,00000 1,000 Project_Naval 1
2 Project_Naval 2 0,80000 0,400 Project_Naval 1 0,600 Project_Estrutural 4
3 Project_Naval 3 0,50107 0,021 Project_Naval 1 0,979 Project_Estrutural 4
4 Project_Tubo 1 0,32745 1,000 Project_Estrutural 4
5 Project_Tubo 2 0,32745 1,000 Project_Estrutural 4
6 Project_Tubo 3 0,32745 1,000 Project_Estrutural 4
7 Project_Tubo 4 0,32745 1,000 Project_Estrutural 4
8 Project_Estrutural 1 0,82345 0,021 Project_Naval 1 0,979 Project_Estrutural 4
9 Project_Estrutural 2 0,87793 0,091 Project_Naval 1 0,909 Project_Estrutural 4
10 Project_Estrutural 3 0,68700 1,000 Project_Estrutural 4
11 Project_Estrutural 4 1,00000 1,000 Project_Estrutural 4
12 Project_Estrutural 5 0,81131 0,200 Project_Naval 1 0,800 Project_Estrutural 4

Proceedings of the 10
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Table 13- CCR Model Execution

Source: Execution from DEA-Fontier
As Table 4 shows the DMUs 1 and 11 are operating at optimal scale. Thus, they are
considered the benchmark projects.

Table 14 - efficiency ratio scale

Source: Execution from DEA-Fontier

Inputs Outputs
Duration of Project Number of Products Delivered
Cost (R$) Opportunities (Tons Sold)
Input-Ori ented
CRS Sum of Optimal Lambdas
DMU No. DMU Name Effi ci ency lambdas RTS with Benchmarks
1 Project_Naval 1 1,00000 1,000 Constant 1,000 Project_Naval 1
2 Project_Naval 2 0,60000 0,600 Increasing 0,600 Project_Naval 1
3 Project_Naval 3 0,40498 0,570 Increasing 0,493 Project_Naval 1 0,078 Project_Estrutural 4
4 Project_Tubo 1 0,10726 0,167 Increasing 0,167 Project_Naval 1
5 Project_Tubo 2 0,21015 0,556 Increasing 0,089 Project_Naval 1 0,467 Project_Estrutural 4
6 Project_Tubo 3 0,29246 0,868 Increasing 0,026 Project_Naval 1 0,841 Project_Estrutural 4
7 Project_Tubo 4 0,29246 0,868 Increasing 0,026 Project_Naval 1 0,841 Project_Estrutural 4
8 Project_Estrutural 1 0,82252 1,019 Decreasing 1,019 Project_Estrutural 4
9 Project_Estrutural 2 0,87393 1,083 Decreasing 1,083 Project_Estrutural 4
10 Project_Estrutural 3 0,68268 0,992 Increasing 0,002 Project_Naval 1 0,991 Project_Estrutural 4
11 Project_Estrutural 4 1,00000 1,000 Constant 1,000 Project_Estrutural 4
12 Project_Estrutural 5 0,53097 0,489 Increasing 0,302 Project_Naval 1 0,187 Project_Estrutural 4
Inputs Outputs
Duration of Project Number of Products Delivered
Cost (R$) Opportunities (Tons Sold)
Input-Ori ented Input-Oriented
CRS VRS Scale
DMU No. DMU Name Effi ci ency Efficiency Efficiency
1 Project_Naval 1 1,00000 1,00000 1,00000
2 Project_Naval 2 0,60000 0,80000 0,75000
3 Project_Naval 3 0,40498 0,50107 0,80823
4 Project_Tubo 1 0,10726 0,32745 0,32756
5 Project_Tubo 2 0,21015 0,32745 0,64178
6 Project_Tubo 3 0,29246 0,32745 0,89316
7 Project_Tubo 4 0,29246 0,32745 0,89316
8 Project_Estrutural 1 0,82252 0,82345 0,99888
9 Project_Estrutural 2 0,87393 0,87793 0,99544
10 Project_Estrutural 3 0,68268 0,68700 0,99372
11 Project_Estrutural 4 1,00000 1,00000 1,00000
12 Project_Estrutural 5 0,53097 0,81131 0,65445

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Results Analysis
Application of Data Envelopment Analysis (DEA) to calculate the technical efficiency,
to identify benchmark projects and to calculate the scale efficiency in product
development, proving the method's potential according the results of this study.
In the Project Portfolio studied, it can be noticed that 80% have technical and scale
inefficiency (Table 4).
As emphasized, the simple quantification of a DMU is not sufficient to instruct on how
to improve their efficiency. Ferreira and Gomes (2009) showed that it is necessary,
moreover, to identify what percentage of efficiency can be improved from the
elimination of excess resources as well as incorrect scale production.
To improve the efficiency of inefficient projects were identified factors that ensured
the arrangements for the benchmark projects.
Respondents agree that there is a relationship between the degree of integration and
performance indicators of the organization. The main characteristics observed in the
benchmark projects were: increased productivity, reduced development time,
anticipation of the solution, compliance dates delivery, increased value-added
products, standardization of processes, integration of processes, speed of information
and ease of access to information.

These results have established practices to be implemented for projects that showed
technical and scale inefficiency. Among the critical success factors were identified, in
the sequence described, practices that contributed to the success of Projects Naval 1
and Structural 4, which were considered the benchmarks of portfolio analysis:
- Working in cross-functional teams, including customers and suppliers,
- Development Product Process of well-defined, from concept to launching;
- Ability to capture customer requirements;
- The project leader had the technical, managerial and interpersonal skills
needed to manage conflicts and problems.
By the application of the .NTCR Model, the projects are classified in: innovation, low
technology, system and critical time. Except 4 projects from Tubes Program that are
classified in: innovation, high technology, system and critical time. The Data
Envelopment Analysis (DEA) with BCC (Banker, Charnes, Cooper) input-oriented
model would apply to 8 projects instead of 12.
Conclusions
It can be concluded that the adoption of methodologies aimed at efficiency project
management is an essential tool for competitiveness of the organization, motivating
employees, improving management processes and reducing time for product delivery.
An attempt was made to apply DEA methodology on development product
management, using a case study of Brazilian steel industry. The main results were the
identification of benchmark projects, which had maximum technical efficiency and the
indication that 80% of projects in the portfolio analysis showed technical and scale
inefficiency.

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The results are valid as a first reference for managers. However, the limited number of
projects and the absence of similar studies should be considered as a limitation of this
research.
References
BANKER, R. D.; CHARNES, A.; COOPER, W.; Some Models for Estimating Technical
and Scale Inefficiencies. In Data Envelopment Analysis. Management Science, Vol. 30,
No. 9, pp. 1078-1092, Set. 1984.
CHARNES, A.; COOPER, W.; RHODES; E.. Measuring the efficiency of decision making
units. European Journal of Operational Research 2, 1978; 429-444..
CHARNES, A.; COOPER, W.; LEWIN; A.Y., SEIFORD,L. M. Data Envelopment Analysis:
Theory, Methodology and Application. 3a. Ed. Massachussetts, USA, 1997. 513p
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Modelos e Aplicaes. Viosa, MG: Ed. UFV, 2009.
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uma referncia para melhoria do processo. So Paulo: 542p, Editora Saraiva.
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ZHU, J.; COOK; W. D.. Data Envelopment Analysis: Modeling Operational Processes
and Measuring Productivity. York University, Canada. Wade D. Cook, 2008.




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31. Technical eciency of Burkina
Faso primary public health care
centers
Oumarou HEBIE
Institute of Empirical Research in Political Economy, hebie.oumarou@gmail.com
Simon TIENDREBEOGO
Institut de Recherche en Sciences de la Sant, stiendrebeogo@irss.bf (corresponding author)
Sni KOUANDA
Institut de Recherche en Sciences de la Sant, skouanda@irss.bf (corresponding author)
Abdel Latef ANOUZE
American University of Beyrouth, aa153@aub.edu.lb (corresponding author)
Abstract
Millennium Development Goals 4th and 5th axes aim to reduce infant mortality and
enhance maternal health by the year 2015. However, in Burkina Faso (West Africa),
these indicators remain worrying. To face this situation, Burkina Faso engaged the
extension of Obstetrical and Neonatal Emergency Care (EmNOC) strategy since 2004.
The main objective of this paper was to assess technical efficiency of the public basic
health care organizations (CSPS) related to SONU. The great number of such
organizations and their spatial distribution make them more accessible for women
who need EmNOC. We found, by an output oriented model that the median efficiency
score of the CSPS is 1.17 and less than 20% of the CSPS are fully efficient; none of the
sixty three health district of the country is efficient. Rural location of CSPS and lack of
electricity seems to be the main environmental factors of inefficiency according to our
data.
Keywords: Data Envelopment Analysis (DEA), Two-stage estimation, Obstetrical and
Neonatal Emergency Care, Burkina Faso.
Introduction
Developing countries remain the most affected by maternal mortality in the world,
536,000 women die each year worldwide due to complications of pregnancy,
childbirth and the puerperium according to United Nations. Millennium Development
Goals (MGDs) 4
th
and 5th axes aimed to reduce infant mortality and enhance maternal
health by the year 2015. However, in Burkina Faso, these two indicators remain
worrying. The maternal mortality ratio was successively 566, 484 and 307.3 for 100000
live births in 1993, 1998 and 2006. Other indicators show that Burkina Faso has a poor
health status. The public expenditure on health is extremely low, amounting to less
than 6.1% of the GDP. In addition, the distribution of health resources is highly
skewed reflecting significant regional disparities in health services across the country.

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In response to the increasing costs of health care, policy-makers have become
increasingly concerned with improving the efficiency of health services sector. In
Burkina Faso, over the last two decades, various health reform measures have been
implemented to reduce the health expenditure and to improve the efficiency of health
services, with the current insufficient health resources and the limited funds allotted.
Health System
The health system has two types of structures: the administrative structures and the
hospitals and social-health. The health system is pyramidal and has three levels: the
central level represented by the oce of Minister of Health, the General Secretariat
and the central departments; the intermediate or regional level (there are 13 Regional
Directorates of Health); the peripheral level or operational which includes 63 health
districts. The central level is the level of direction, design and policy making and
national development plans in health. The intermediate or regional level is the level of
monitoring of the implementation of policy and national development plans in health.
The peripheral level is managed by a team headed by a district medical ocer. This is
the operational level where the development plans for health are implemented. The
health district is the operational entity.
Methods
Data Envelopment Analysis
The literature on eciency measurement is broadly divided into using non-parametric
and parametric methods. The non-parametric methods include Data Envelopment
Analysis (DEA), the most popular eciency measurement method. In this study, DEA
is used to measure the technical eciency of health centers because the method,
handles several outputs, does not require explicit specication of the functional forms
relating inputs and outputs and does not require information on prices of inputs and
outputs. DEA is a linear programming formulation for frontier analysis that denes a
relationship between multiple inputs and multiple outputs. DEA was introduced by
Charnes, Cooper, and Rhodes pursuing Farrells work. Charnes et al proposed a model
that had an input orientation and assumed constant returns to scale (CRS). Subsequent
works have considered alternative sets of assumptions, such as Banker, Charnes and
Cooper, who proposed a variable returns to scale (VRS) model known as BCC model.
Since early 1980s, DEA has been extensively used for eciency analysis of health care
organizations. Chilingerian and Sherman noted that DEA has become the researchers
method of choice for nding best practices and evaluated productive ineciency in
health care organizations
The DEA models are broadly divided into input-orientated and output-orientated
models. The output orientated model determines by how much outputs quantities can
be proportionally expanded without altering the quantities of inputs. The choice of
model orientation depends on the extent to which the health center managers have
control on its inputs or outputs. In this study, an output orientation has been chosen
because CSPS managers have not total control on all inputs.

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The DEA model used in this study is an output-oriented BCC which takes the
following form:

Aggregated eciency scores and Tobit regression
In this paper we also computed the aggregated eciency scores. This is done by
Simar and Zelenyuk approach (2007). Based in a previous paper of Fare and Zelenyuk
(2003), they give price-independent weights to be considered for aggregate eciency
score calculation. Finally truncated tobit regression was used to regress primary health
care centers eciency scores on environment variables.
Source of data and study variables
Data for this study were mainly obtained from the Assessment Obstetrical and
Neonatal Emergency Needs coupled to the mapping of the supply of care in
reproductive health in Burkina Faso Report.
The variables involved in the study concerned characteristics of primary health care
centers, their resources and outputs. Eleven input variables and four output variables
were used (Table 1) to measure the technical relative eciency.
Inclusion criteria
All health districts were included. In each district, all primary health care centers that
met the following criteria were included: Public facility, practice of delivery, no
missing data for the study variables. Outlier primary health care centers according to
eciency score were also excluded.
Results and discussions
General description
Analysis was performed on sample of 996 primary health facilities in Burkina Faso.
Most of the primary health care centers were rural (90,8%). More than one primary
health care center did not receive electricity (28%) and 15% of primary health care
centers was not supplied with water.
These facilities have a variation in term of equipment and resources endowment. In
term of obstetric capacity, the range is between 1 and 20. More than 75% have no
wise women while the maximum number found is 8 (Table1).



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Table 2 Descriptive statistics of inputs
Inputs Mean(IQR

Min Max (%)
Number of units 3(2 ;3) 1 5
Number of beds in the obstetrics 4(3 ;5) 1 20
Wise women or men number 0(0 ;0) 0 8
Number of auxiliary midwives 1(1 ;1) 0 19
Other health workers 2(2 ;3) 1 21
Number of delivery tables 1(1 ;2) 0 5
Number of category of recommended

5(5 ;5) 1 6
Others medecines

Anticonvulsive + Oxytocin 2(2 ;2) 2 2
Number of basic equipement 5(5 ;5) 1 5
Number material for

neonative care 1(1 ;1) 1 3
Number of elements in

the delivery box 8(7 ;9) 2 10

The variation is very wide in outputs compared to inputs. The range of delivery
number is great than 100 (Table 3).

Table 3 Descriptive statistics: outputs
Outputs Median

Min Max
EmNOC related units 5(5 ;6) 2 7
Total number of delivery 247(156 ;378) 1 2598
Total number of abortion

5(1 ;11) 0 254
Number of live births 244 (153 ;372) 6 3331
Efficiency estimation
Only 20% of primary health care centers are fully ecient. Most of them (80.42%)
have slacks and more than 70.5% of primary health care centers are inecient (Table
4). Most of CSPS (75.2%) are inecient at each step of their production process.






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Table 4 Eciency status
Efficiency (F) range CSPS number percentage (%)
F=1 292 29.5
1< F61.1 355 35.8
1.1<F61.2 232 23.4
1.2<F61.3 51 5.1
1.3<F61.5 231 23.3
1.5<F62 119 12.0
2<F6 5 3 0.3

Table 5 description of slacks
Slack Status Fully efficient Only x slacks Only y slack x and y slack
Count 194 44 8 745
Percentage 19.6 4.4 0.8 75.2

Many health centers can improve their performance. Indeed, 50% of CSPS can
proportionally increase their outputs quantity by 17% with the current inputs
(efficiency median index is 1.17). Moreover Burkina Faso CSPS can assess their
eciency according to outputs quantity improvement by 23%
Independent of the region, the proportion of ecient CSPS is less than 40%.
Nevertheless, we notice a variation of efficiency among regions. For instance, Centre-
Sud, Boucle du Mouhoun, Sahel regions have high proportions of eciency CSPS
(more than 25%). The less proportions are found in Hauts-Bassins, Centre-Est and Est
regions where the proportion of ecient CSPS is less than 15%. The aggregated
eciency score show that Boucle du Mouhoun, Centre Sud and Sahel are, by
decreasing order, the most ecient regions and Plateau Central, Est, and Cascades are
the less efficient
In the same way, analyses show that Nouna, P health districts are the most efficient
while Banfora and Bousse are the less efficient health districts.
Environmental variables and inefficiency
The multivariate analysis show that only poor women care special subsidy is
signicant. Nevertheless, rural location and electricity source have signicant
coecients (at level 0.1). Poor women subsidy and electricity source contribute
(respectively by 9.5% and 6.18%) to move the eciency score toward 1. In contrast,
rural location increases ineciency respectively by 13.8% (Table 8).





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Table 8 Tobit regression results summary
Coefficients Estimate Std. error t-value Pr(>

Signif.
Intercept 1.256 0.074 16.832 2.2e-16 ***
Education level 0.05 0.059 0.850 0.395

Rural 0.139 0.070 1.989 0.047 *
Distance from the referee obstetric

-0.0006 0.0006 -0.988 0.323

Duration to the referee obstetric

0.0005 0.0003 1.529 0.126

Electrified -0.062 0.031 -1.987 0.047 *
Poor women subsidy -0.095 0.030 -3.134 0.002 **
Not modern source of electricity -0.106 0.064 -1.641 0.101

Not modern source of water -0.009 0.068 -0.139 0.889

Sigma 0.273 0.014 19.727 2.2e-16 ***
Discussion
Seventy per cent of the CSPS in the sample were technically inecient and 20% were
fully efficient. A similar study of 155 primary health care clinics in in Kwazulu-Natal
found 30% of health care clinics to be technically ecient. However, Our nding is
quite upper than the results obtained in Nouna district in Burkina Faso (30%) by
Marshall Flesha (2011), in Ghana (65%) J. AKAZILY (2008). Theses dierences might
be explained by a rather homogeneous structure of the health centers (cases of a
single health district study), a limited number of health centers (regional study) or the
strength/organization of health system and the income of the country(country level
study) or the chosen inputs and outputs.
Most of primary health care centers (80%) use more inputs than need at current
operational level. Theses health centers can produce the same level of outputs using
17% less of each input. It should however be noted that this does not imply the
presence of excess capacity relative to needs. It might be explain by the lower
utilization rate of health services due to possibly demand-side barriers of any type.
Centre sud, Boucle du Mouhoun and Sahel are the most ecient regions. For Sahel
and Boucle du Mouhoun regions, it might be related to the high proportion of health
centers applying free cost for a normal delivery (41% and 31% respectively). Centre
Sud has the highest percent of health centers (55%) with a formal system of poor
women subsidy and the second low rate of homebirth (15%). These regions host the
most ecient primary health centers. Nouna the best one is in Boucle du Mouhoun
region while Po the second is in Centre-Sud. Marschal and Flesha found that 70% of
primary health centers in Nouna are technically ecient. Our results show that health
center location, power supply, and poor women care subsidy are in increasing order
factors aecting health centers ineciency. Rural location increases inefficiency. It
could probably be related to, among other things, care seeking behavior of the
catchment population and population density. For example, the high proportion of
homebirth is found in rural location (39%). This factor is found by Tamiru Balchia in

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analyzing Ethiopia health center efficiency. Others studies cited location as factor
which inuence eciency. Poor women subsidy contributes to better use of health
care centers while lack of power supply makes dicult service providing in night.
Power supply increase health access by improving patients sojourn in health centers.
Conclusions
The study shows that 80% of primary health care centers are inecient. These
facilities are not operating at a full technical capacity and could increase their outputs
within existing budgets. The evidence indicates that capacity utilization is insucient
in rural health centers, those without power supply and system of care for indigent
women. Our study recommends the adoption of policies for better management of
health centers and better use of health services.
References
WW Rhodes E. Charnes A, Cooper. Measuring the efficiency of decision making units.
European Journal of Operational Research, 2 :429444, 1978.
Rolf FRE and Valentin ZELENYUK. On aggregate farell efciency. European Journal
of Operational Research, 146:615620, 2003.
Lopold SIMAR and Valentin ZELENYUK. Statistical inference for aggregates of farell-
type efciencies. Journal of Applied Econometrics, 22:13671394, 2007.
]Paul MARSHALL and Steffen FLESSA. Efciency of primary care in rural burkina faso.
a two-stage dea analysis. Health Economics Review, pages 15, 2011.
Street A Jacobs R, Smith PC. Measurin Efciency in Health Care: Analytic Tech-niques
and Health Policy. Cambridge: Cambridge University Press, 2006.


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32. The efficiency of Brazilian
electricity distributors during
2004 2009. An application
using DEA corrected by
environmental and stochastic
factors.
Fernando Damonte
Quantum
7
, fdamonte@quantumamerica.com
Mariana De Santis
Quantum
8
, mdsantis@quantumamerica.com
Introduction
The aim of this study is to estimate the efficiency of the electricity distribution
companies in Brazil during 2004 to 2009. For this purpose, a semi-parametric
methodology that incorporates the impact of environmental variables and statistical
noise is applied. DEA is employed supplemented with SFA methodology, following
Fried et al (2002). This methodology adjusts the amounts of inputs considering
environmental variables and statistical noise using a stochastic frontier approach,
taking all companies to a common scenario, recalculating then the percentages of
efficiency by DEA. Unlike other methodologies, the amount of each input is adjusted
instead of the efficiency score, allowing environmental variables affect differently to
each of the inputs. This approach is particularly advantageous when estimates of
efficiency include more than one input, such as total expenditures, operating
expenditures and capital expenditures.
The practice of benchmarking with price setting purposes is present in most advanced
worldwide regulations. In Brazil, in the second tariff review (2007-2010),
benchmarking was used in the regulation of the distribution companies to analyze the
global consistency in operating costs obtained by applying the model company
method; to relate technical losses with delinquency rates and to determine the quality
of service. With an analysis of global consistency, the Brazilian regulator (ANEEL)
attempted to validate the reasonableness of the costs of the reference company,
obtained by "top-down" with an alternative methodology. These analyzes were not
made explicit in the discussions with the agents. However, the regulator committed to
explain the global consistency of analyzes to be used in the third review, where

7
Quantum Experts in Public Utilities Regulation www.quantumamerica.com
8
Quantum Experts in Public Utilities Regulation www.quantumamerica.com

Proceedings of the 10
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benchmarking techniques will be essential. In 2011 the third review methodology was
discussed and determined, in which semi-parametric benchmarking techniques were
utilized to calculate optimal operating and maintenance expenditures. DEA and
Corrected Ordinary Least Squares (COLS) were applied to estimate efficiency scores of
each distribution company. In a second step, environmental variables were included
in the analysis, such as concession area socioeconomic complexity, climatic effects,
customer dispersion y regional wage levels, by employing the techniques developed
by Simar and Wilson (2007) and Banker Natarajan (2008)
9
.
Methodology
The methodology used in this study is a three-stage approach according to Fried et al
(2002). This method combines the advantages of DEA and SFA methods. A complete
analysis of the advantages of using a three stage model can be found at Fried et al
(2002). In the first stage, we apply DEA to input and output data to obtain the initial
efficiency scores of firms. In the second stage SFA is used to attribute variation in first
stage electricity distribution companies performance to environmental variables,
managerial inefficiency and random noise. In the third stage, firms inputs are adjusted
to take into account the environmental effects and statistical noise uncovered in the
initial DEA. Finally, DEA is applied to the adjusted inputs to obtain improved
measures of managerial efficiency, net of environmental variables and random noise
effects.
Data
The data used in this study are those used by the Brazilian National Electricity Agency
(ANEEL) to determine the methodology that will be applied for calculating the
electricity rates for the third regulatory period. This database was used by ANEEL, in
the Public Hearing 40, for estimating the efficiency of the distribution companies. The
input and output information was provided by the companies to the regulator. The
environmental variables were surveyed by ANEEL from different sources which are
mentioned below. Additionally we segregated the total number of consumers by type
in small, industrial and rural with information from various public sources.
ANEELs database is available at its official website and it includes 61 electricity
distributors for the period 2004 2009. Years before 2003 were not considered due to
data limitations and to exclude the period of energy rationing that took place in 2001
and 2002. In this study 17 of these companies were excluded due to lack of specific
data mainly related to consumer type disaggregation. Details about the definition of
the variables can be found in the Technical Note 294 by ANEEL.
The variables used in this study are the following:



9
See Technical Note Number 294/2011, SRE/ANEEL

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Operating and maintenance costs (OPEX)
The OPEX data comes from accounting sources (Accounting handbook of Public
Service of Electricity). Costs related to services provided to third parties and those
corresponding to generation and transmission activities were excluded, as well as
related to not regulated activities. Figures are expressed in local currency of December
2010. To do this, we used the producer price index (IGPM), except for items Third
Party Services and Personnel, which were adjusted with the consumer price index
(IPCA) following identical criteria as ANEEL.
Capital Costs
The capital cost considered in this study was calculated according to an economic
concept, including the Annual Depreciation of physical capital and the Opportunity
Cost of Capital. Since the aim of this work is to measure the input-oriented efficiency,
it was considered more appropriate to calculate the cost of capital as the annuity,
because allocating the cost of investments evenly over the period does not harm the
efficiency of companies whose net assets are newer neither reward with low cost (of
capital) those with older assets. For the calculation of the annual rate an opportunity
cost of capital of 16.07% and the average life of the assets of each company were
considered, both parameters used by the regulator in its estimates of efficiency.
Electricity delivered (in MWh)
Electricity delivered is referred to the entire billed market and comes from the
Tracking System Market Information for Economic Regulation of ANEEL (SAMP).
Consumers
It includes Residential, Commercial, Industrial, Rural and other categories on
December of each year of the period.
Distribution network length (in kilometers)
It comprises the length of Low, Medium and High Voltage networks at the end of
every year of the period.
Average wage
The salary was calculated by ANEEL for its estimates of efficiency and it is expressed
in local currency of December 2010. This variable measures the labor cost a
distribution company faces when hiring employees.
Socioeconomic Complexity Index (SECI)
Measures the degree of adversity faced by distributors in regards to electricity non-
technical losses combat. This index, prepared by ANEEL, includes of the following

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dimensions: violence, inequality, deprivation, infrastructure and commitment to
income
10
.

Rainfall (millimeters per year)
The geocoded data regarding isohyets, which composed the calculation of the index
rainfall, come from the National Water Agency - ANA.
Table 15 summarizes the main characteristics of the variables defined above for the
average of the 44 companies included in the analysis.

Table 15: Descriptive statistics of the 44 electricity distributors (2004-2009)
Variable Unit Mean S. D. Minimum Maximum Cases Missing
Operating cost Million Reis 285.5 327.5 4.5 1774.8 245 0
Capital cost Million Reis 503.1 648.9 1.7 3161.5 245 0
Network
Thousand
kms.
61.3 76.4 0.4 460.6 245 0
Total Consumers Thousand 1462.3 1586.7 13 7295.2 245 0
Small Consumers Thousand 1376.8 1471.9 12.7 6685.3 245 0
Industrial
Consumers
Thousand 12.1 17.2 0.1 74.2 245 0
Rural Consumers Thousand 73.4 97.6 0.2 535.6 245 0
Energy distributed GW/h 76359.9 9346.8 68.1 40260 245 0
Average wage Reis 3285 631.7 1925.9 5904.7 240 5
SECI

0.18 0.11 0.02 0.46 240 5
Rainfall index mm/year 1457.5 333 808 2450 240 5
Source: Own elaboration from ANEEL
Estimated models
In order to obtain the efficiency of Brazilian electricity distributors during 2004-2009
three alternative models were estimated:
The first model includes as inputs, operating costs and capital costs, responding to
the premise that the measurement of efficiency must take a comprehensive approach,
including all inputs involved in the production process jointly. Thus, the risk of
measuring the efficiency of operation costs conditioned to the quantity and quality of
the distribution network, which may differ significantly among compared companies,
is minimized. In other words, it excludes the problems associated with the
interchangeability of remuneration to two different production factors (trade - off).
The outputs considered are the number of consumers and network length per year.
For the correction of the slacks of both inputs (stage 2), we considered the following
environmental variables:


10
See Technical Note N. 271/2010 by SRE/ANEEL.

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Average wage,
Socioeconomic complexity index, and
Rain

With regard to the signs of the estimated coefficients associated to the environmental
variables in the adjustment of the optimal slack by SFA is expected average wages
have a positive impact, because the distributors that operate in areas where labor
receives higher wages necessarily face higher costs than those located in areas where
the formal labor market is more depressed. The former face higher wage levels that
raise their costs, being this difference not attributed to inefficient management.
It is expected that companies located in areas with high proportion of social
vulnerability face greater difficulties in reducing non-technical losses. It is therefore
likely that operating costs to combat fraud and costs of anti-fraud network be in direct
relation with indices of socioeconomic complexity. Accordingly, this variable is
expected to be positive in the optimum adjustment of the slack.
The coefficient associated with rain is expected to be positive, since companies
operating in rainy areas are exposed to higher operational costs for service restoring
such as network reconnection costs, posts and line replacement, etc.
The second model includes the same inputs and outputs than the first, with the
difference that the consumers are broken into three categories: small, composed by
residential and commercial consumers, industrial and rural consumers.
The third model considers as input only the operation and maintenance costs.
Unlike the previous models, it only focuses on the OPEX efficiency, by controlling the
magnitude of invested capital with the network length. It is worth mentioning that the
Brazilian regulatory benchmarking techniques used to promote efficiency in the last
review conducted last year were applied only to OPEX. It was decided to consider as
outputs the number of served customers, the total energy delivered and the network
length. The latter is also treated as an output by the Brazilian regulator, as well as by
other authors, who consider the number of kilometers of maintained network as an
output. Estache et al (2010), however, show that in numerous studies of
benchmarking is often used as input the length of the network as a proxy for capital
input, usually in the estimates of cost functions or distance functions. (p. 143).
Environmental variables used in the adjustment of the optimal slacks are the same as
in the previous models.
Results and discussions
Estimations were performed using the LIMDEP 9.0 software. In the initial stage of the
estimation the efficiency of companies in the sample was calculated adopting an input
orientation DEA technique under the assumption of variable returns to scale. We
chose variable returns to scale, a general assumption, because there are no a priori
reasons to assume that electricity distributors face constant or decreasing average
costs. A summary of Stage 1 results is presented in Table.


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Table 2: First stage results
Model Outputs Inputs Mean Std. Deviation Minimu
m
Maximum n
Model 1
Total Consumers, Network
Length, Total Energy
Delivered
OPEX,
CAPEX
80.44% 0.14235688 0.500967 1.000 240
Model 2
Outputs: Small Consumers,
Industrial Consumers, Rural
Consumers, Network Length,
Total Energy Delivered
OPEX,
CAPEX
85.98% 0.133589664 0.51698 1.000 240
Model 3
Outputs: Small Consumers,
Industrial Consumers, Rural
Consumers, Network Length,
Total Energy Delivered
OPEX 74.05% 0.188425685 0.280055 1.000 240

From the results of the first stage, we calculated each company's slacks, which were
adjusted to incorporate the effect of environmental and stochastic variables. It was run
a regression for each of the slacks for each input of the model under the assumption
that the error term that captures inefficiency presents a normal distribution truncated
at 0. We adopted a panel data model with random effects, in which inefficiency varies
in the period according to the Batese - Coelli model. The estimated coefficients
presented in all cases the expected sign and are statistically significant. The variable
rain only was statistically significant in Model 3. Companies operating in areas where
the wage is higher face higher costs, as well as those that operate in higher social
conflict areas. The parameter lambda is statistically different from zero, indicating that
managerial inefficiency explains the variability of slacks between sample firms and
time.
The impacts of environmental variables and the stochastic variables estimated in the
second stage were incorporated into the inputs of each company, which were
adjusted to carry all distributors to a common operating environment. To do so, input
quantities of the producers who were benefited from a favorable environment and
"good luck" were adjusted upward.
Finally, the efficiency scores were recalculated using the input adjusted in the second
stage. A summary of the results is presented in Table 3, which shows the average
efficiency scores for the total sample and for some groups of distributors. As expected,
in all cases efficiency is higher after separating the non-managerial component of total
slacks. In general, the average efficiency rises from 0.8/0.86 to 0.93/0.92 in the
estimation considering OPEX and Capital Costs as inputs (Models 1 and 2), whereas in
model 3, the initial mean score, 0.74 increases to 0.89 in the last stage.


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Table 3: Average Efficiency scores (Stage 3)
Model 1 Model 2 Model 3
Firm group N Stage 1 Stage 3 Stage 1 Stage 3 Stage 1 Stage 3
Smallest size
Less than 500000 consumers
78 0.76 0.92 0.87 0.92 0.73 0.87
Medium Size
More than 500000 and less than 3
million consumers
126 0.80 0.92 0.83 0.92 0.70 0.88
Largest size
More than 3 million consumers
36 0.91 0.97 0.93 0.97 0.92 0.99
All the simple 240 0.80 0.93 0.86 0.92 0.74 0.89

Note that the average score of the companies serving larger quantities of customers
(more than 3 million customers) is higher than those classified as small and medium
companies both in the first and third stage of the estimations in all models, while no
significant disparities are observed between the smallest and medium firms. Notice
that after "leveling the playing field," according to Fried et al (2002), the size of the
distribution companies seems to reduce its impact in the final estimations of the
companies efficiency. However, results suggest that larger companies present
advantages with regards to smaller ones, attributable to higher density reducing the
unitary cost.
It is also worth noting that model 3 shows smaller efficiency scores than models 1 and
2, suggesting that when the analysis is more complete, considering both, OPEX and
Capital Costs, the existing tradeoffs between capital and labor is better captured by the
model, whereas when only estimating OPEX efficiency, companies that are more labor
intensive might be considered inefficient. It seems clear that when considering both
inputs, inefficiency is better isolated from the other variables that affect costs.
Conclusions
In this study we have obtained estimates of the efficiency of electricity distributors in
Brazil in the period 2004 - 2009, applying the DEA methodology and SFA. The results
show that the impact of non-managerial variables such as level of input prices and
socioeconomic complexity, as well as statistical noise, affect significantly on the
efficiency of firms in the sample, being this effect more significant among small and
medium firms. A notable contribution is the incorporation of the stochastic variables in
the models, in contrast with the methodology used recently by the Brazilian regulator,
which explicitly included environmental variables but excluded the effect of statistical
noise. Another interesting aspect is the inclusion of capital costs in the models jointly
with OPEX, capturing the effect of possible trade-off between these two inputs.
Moreover, the efficiency scores of each electricity distributor show small variations
along each of the years, unlike the results obtained by the regulator in the last
revision, in some cases showing sharp fluctuations in the scores.
It is worth noting that in this study a more complete model was estimated in
comparison to the common practice by considering different types of consumers,
which allows taking into account the different degrees of effort required to serve
diverse users. The results indicate the tradeoff between OPEX and CAPEX, since the
average score increases when the inputs representative of capital is explicitly

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incorporated in the model. It should be noted that the frontier was recalculated after
correcting the inputs by environmental variables, in clear difference with another
methodologies that only correct the scores. This process is known as re-evaluation of
the frontier. To conclude, we recognize it is necessary to explore other models and
specifications in order to reflect with more precision the production process, i.e. to
consider energy delivered by voltage level or the maximum demand.
References
Banker, R.D. and R. Natarajan (2008). Evaluating contextual variables affecting
productivity using data envelopment analysis. Operations Research 56(1): 48-58.
Baumol, W., Panzar, J. and Willig, R. (1988) Contestable markets and the theory of
industry structure, Harcourt Brace Jovanovich, Inc.
Burns, P. and Weyman-Jones, T.G, (1996). "Cost Functions and Cost Efficiency in
Electricity Distribution: A Stochastic Frontier Approach," Bulletin of Economic
Research, Wiley Blackwell, vol. 48(1), pages 41-64, January.
Farsi, M. and Filippini, M. (2004). Regulation and Measuring Cost Efficiency with
Panel Data Models: Application to Electricity Distribution Utilities, Review of Industrial
Organization, 25 (1): 1-19.
Farsi, M., Filippini, M. and Greene,W. (2005). "Application of Panel Data Models in
Benchmarking Analysis of the Electrivity Distribution Sector," CEPE Working paper
series 05-39, CEPE Center for Energy Policy and Economics, ETH Zurich.
Fried, H.O.; Lovell C.A.K.; Schnidt S.S.; Yaisawarng S. (2002), Accounting for
Environmental Effects and Statistical Noise in Data Envelopment Analysis, Journal of
Productivity Analysis 17, 157-174.
Goto, M. and Tsutsui, M. (2008). "Technical Efficiency and Impacts of Deregulation:
An Analysis of Three Functions in U.S. Electric Power Utilities During the Period From
1992 Through 2000," Energy Economics, 30:1, 15-38.
Growitsch, C., Jamasb, T. and Pollitt, M. (2005). "Quality of Service, Efficiency, and
Scale in Network Industries: An Analysis of European Electricity Distribution," IWH
Discussion Papers 3, Halle Institute for Economic Research.
Hess, B. and Cullmann, A. (2007). "Efficiency analysis of East and West German
electricity distribution companies - Do the "Ossis" really beat the "Wessis"?," Utilities
Policy, Elsevier, vol. 15(3), pages 206-214, September.
Jamasb, T. and Pollitt, M., (2003). "International benchmarking and regulation: an
application to European electricity distribution utilities," Energy Policy, Elsevier, vol.
31(15), pages 1609-1622, December.
Mota, R., (2004). Comparing Brazil and USA electricity distribution performance: what
was the impact of Privatization? Cambridge Working Papers in economics, CWPE
0423. The Cambridge-MIT Institute.

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Neuberg, L. (1977) Two issues in the municipal ownership of the electric power
distribution systems, The Bell Journal of Economic Vol. 8, No. 1 (Spring, 1977), pp.
303-323.
Prez-Reyes, R., and Tovar, B. (2009): Measuring Efficiency and Productivity Change
(PTF) in The Peruvian Electricity Distribution Companies after Reforms, Energy Policy,
37, 2249-2261.
Ramos-Real, F., Tovar, B., Iootty, M, Fagundes de Almeida, E. and Queiroz, H. (2009).
The evolution and main determinants of productivity in Brazilian electricity
distribution 1998-2005: an empirical analysis, Energy Economics, 31 (2) 298-305.
Sharkey, W. (1982) The theory of natural monopoly, Cambridge University Press.
Silva, Hamilton (2011). Cost Efficiency in Periodic Tariff Reviews: The Reference
Utility Approach and the Role of Interest Groups. University of Florida, Department
of Economics, PURC Working Paper.
Simar, L. and Wilson, P. W. (2007). "Estimation and inference in two-stage, semi-
parametric models of production processes," Journal of Econometrics, Elsevier, vol.
136(1), pages 31-64, January.
Tovar, B., Ramos-Real, F. and Fagundes de Almeida, E. (2011). Firm size and
productivity. Evidence from the electricity distribution industry in Brazil, Energy
Policy, 39 826-833.


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33. The production efficiency in
sugarcane farms
Terezinha Bezerra Albino Oliveira
UFSC/UFAL. E-mail: tbalbino.ceca@gmail.com (Corresponding author)
Antonio Cezar Bornia
UFSC. E-mail: cezar@deps.ufsc.br
Suely de Ftima Ramos Silveira
(UFV. E-mail: sramos@ufv.br
Mauro Wagner de Oliveira
UFAL. E-mail: maurowoliveira@gmail.com
Alexandre Matos Drumond
UFV. E-mail: matosdrumond@gmail.com
Abstract
This study was conducted to evaluate the production efficiency in sugarcane farms, by
using DEA. Seventeen DMUs comprising 2010-2011 harvest were considered. The
inputs were the rent of the land; raw material; and costs of the harvest, loading and
transport of the sugarcane. The revenue on sugarcane sale was considered as output.
The CCR addressed to inputs was used as model. The stalk productivity ranged from
76 to 114 t of stalks/ha, as the average productivity being 81 t/ha. The fertilizer costs
ranged from R$14.33 to R$366.59/ha; however, the costs of harvest, loading and
transport of the stalks were the highest, as ranging from R$16.43 to R$27.16. There
was a relationship between crop productivity and profit in R$/ha. From 17 DMUs, six
were efficient. Those six DMUs were considered as benchmark to the other inefficient
DMUs. The DEA method contributed to identify efficient sugarcane farmers and to
explore their knowledge in order to improve the inefficient farms.
Keywords: Data Envelopment Analysis; sugarcane; agricultural management.
Introduction
In the world scenery, Brazil stands out as the largest producer of sugarcane, with
approximately 33% of the world production, and it is considered as the first one in
production of sugar and ethanol, as accounting for over half of the sugar traded
worldwide (MAPA, 2011). This position has been occupied mainly due to the cropped
area that is relatively large, the high productivity levels achieved in the main
producing regions of the country and due to the increased productive potential of
new cultivars (MARTINELLI, 2011, OLIVEIRA et al., 2011).
In recent decades, has become increasable interest in the sugarcane crop, either on
socioeconomic viewpoint and environmental aspect.

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Among the main positive economic impacts, it may be mentioned: employment and
income generations, development interiorization, increase of the foreign exchange
arising from the exportations and the possibility for complementing the increasing
energy demand of the Country which depends on oil and natural gas. Concerning to
environmental aspect, the high fixation rate of the atmospheric CO2 by sugarcane,
during an extended time period, naturally contributes to improvement of the
environment, since it reduces the greenhouse effect occasioned by the burning of the
fossil fuels (SOUTO, 2011, SUNDFELD; MACHADO, 2011, OLIVEIRA et al., 2007).
Besides this environmental importance, this crop is distinguished in production of the
ethanol, a fuel so-called "clean", since it proceeds from renewable sources which, as a
complement or replacement to fossil fuels, contributes to reduce the effects of the
global warming (MARTINELLI, 2011, GALLARDO; BOND, 2010, GOLDEMBERG, 2007).
The rural enterprises require an evaluation under the viewpoint of their efficiency
when performing those activities. However, to evaluate the inputs and outputs in the
production and efficiency improvement processes of those properties, those authors
suggest the use of the techniques or methods that provide more objective and
accurate information than those obtained through the analysis of either profitability
and financial indicators, since there are several external factors that may affect the
results (TORQUATO et al., 2009).
The managers of the organizations require operational tools that are based on
theoretical and well-founded principles that evaluate and measure the efficiency.
However, several scientific contributions are complex and present difficult application
outside the academic ambit or technical expertise either by the high cost, the long
time to generate results and the limited flexibility to adequate to different real
situations (FERREIRA; GOMES, 2009).
The Data Envelopment Analysis has been widely used on situations in which the
proposal is the measurement of the performance of organizational units where the
presence of multiple inputs and multiple outputs rather makes comparison difficult
(REIS et al., 2011, SOUZA et al., 2009, FERREIRA; GOMES, 2009, ONUSIC et al., 2007,
MELLO et al., 2005, BANKER et al., 2004, COOPER et al., 2004).
To visualize the potentialities and to help the detection of the strangulation points in
the sugarcane-producing properties, it is justified the need to answer the main
question: "How to evaluate the efficiency of the farms producing sugarcane, by using
procedures and criteria that contemplate the main production factors that characterize
the productive activity and their interrelationships".
In this scenario, the present research was carried out to evaluate the productive
efficiency of 17 sugarcane properties located on northeastern Minas Gerais, through
the Data Envelopment Analysis (DEA).
Methods
Concerning to objective, this research is characterized as exploratory and descriptive.
In relation to results, this research is classified as applied.
The data were obtained from SEBRAE/MG, for the period 2006 to 2011 (for five
sugarcane crops) and, complementarily, the technical visits were made to sugarcane

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properties. To measure the relative efficiency of the sugarcane rural properties under
study, the method Data Envelopment Analysis (DEA) model CCR (Constant Returns to
Scale) with orientation towards inputs (CHARNES et al., 1978). The software SIAD v3.0
was used to process the inputs and the output. The inputs-oriented model was chosen
due to the possibility for intervention by farmers managers in attempting to reduce
the costs of production, which would be a possibility greater than its ability to
influence the selling price of their products in the sugarcane market. From this choice,
the generated results will contribute to identify the inputs and their respective
proportions, therefore maintaining constant the output, the inputs can be reduced in
order to reach the efficiency in the input-output relationship.
To evaluate the relative efficiency of 17 sugarcane properties (DMUs), adopted the
following inputs and outputs were adopted, Figure 1:

Figure 1. Productive process in the sugarcane farms
For better understanding of the proposed model, the description of the inputs and
outputs included in Figure 1 are presented as follows.
a) Input 1: The rent of the land amounted 10 tons of sugarcane at market price (R$
45,00/t).
b) Input 2: The raw material consists of the values of the sugarcane sucker, manure,
fertilizer, liming material, insecticide and herbicide (R$/ha).
c) Input 3: To meet the variable "quantity of human resources", the following factors
will be considered: the remuneration of the workers in agricultural activities, as
including cutting, loading and transportation of the sugarcane (R$/ha).
d) Output: Revenue (R$/ha) of the sugarcane is the result from the tons of the
produced sugarcane multiplied by the price per ton of sugarcane.
The set of the inputs and outputs were chosen due to importance in evaluating the
efficiency of the main components of the production system of a sugarcane stand,
since according to Burnquist (2011), Macedo et al. (2004), Oliveira et al. (2011),
Dematt (2005), Vitti; Mazza (2002), Fernandes (2000), the choice of efficient cropping
techniques and practices should comprise from planning to implementation of the
sugarcane plantation. Besides, the optimization of the use of the inputs, of the land
and of the labor increases the crop productivity, reduces the production costs and
increases profitability of the rural properties, besides contributing to environmental
preservation when the inputs are efficiently used.

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Results and discussions
When analyzing the composition of the production costs of 17 sugarcane farms, it was
identified that the the rent price and the price of the sugarcane suckers for planting
were the same for all rural properties:R$450,00/ha and R$225,00/ha, respectively. The
fertilization cost ranged from R$ 14,33/ha and R$ 366,59/ha. However, the highest
cost were the cutting, loading and transportation of the industrialized stalks per ton,
which ranged from R$ 18,26 to R$ 27,16, as being mainly affected by the distance
from farm to industry as well as by the productivity of the crop.
From the data envelopment analysis, six efficient farms in the input-output
relationship were identified. The results of the efficiency as well as the ranking of the
Farms under study are shown in Table 1.


Table 1. Results of the efficiency score and ranking of 17 sugarcane farms, by
using the CCR model, input orientation.
The DMUs 6; 8; 10; 12; 13; and 16 were considered as effective, since they obtained a
score of 100% relative efficiency (Table 1). Those DMUs to the obtained production
level were efficient in their use of inputs, because no losses were identified.
It is observed the differences to occur in efficiency scores of the 17 farms under
analysis, as ranging from 100% to 74.2%. For farms that have not been effective, as
maintaining constant the amount of the revenue obtained, it is considered that its
possible to reduce the level of the inputs used, as the results shown in Table 2.
Among the DMUs considered as inefficient, the need for reducing the value of inputs
per hectare are identified in all three variables under analysis. Table 2 presents the
results for inefficient farms, and it is emphasized that they are presented in decreasing
order of the efficiency score obtained.


Ranking DMUs Efficiency score Ranking DMUs Efficiency score
1 DMU6 1 5 DMU17 0,926
1 DMU8 1 6 DMU5 0,922
1 DMU10 1 7 DMU14 0,918
1 DMU12 1 8 DMU4 0,913
1 DMU13 1 9 DMU11 0,833
1 DMU16 1 10 DMU2 0,819
2 DMU3 0,975 11 DMU9 0,809
3 DMU15 0,949 12 DMU1 0,742
4 DMU7 0,929 -

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Table 2. Current input, target for the inputs and percent
reduction of inputs in the inefficient sugarcane farms.

It should be noted among the three input variables under analysis that the total raw
materials used, on average, showed a greater reduction in expenses required for the
DMUs to achieve the goal of reduction (17.8%), although the indicated highest
reduction refers to the variable land rent for DMU2 (36.5%).
Those farms considered as effective are the benchmark for other units of the analysis.
This reference varies according to approximation of the use levels of the inputs and
outputs among farms, as ranging from 0 to 1. The importance of efficient DMU for the
other is greater the closer to 1.
Table 3 presents the results of the benchmark analysis, considering the farm which is
the main reference for the index and the importance of reference (lambda).

DMUs Input / ha Real Input Target Input Reduction
land rent 450 439 2,5%
raw material 584 569 9,2%
human resources 1516 1477 2,5%
land rent 450 427 5,1%
raw material 964 914 27,5%
human resources 2399 2276 14,1%
land rent 450 418 7,1%
raw material 632 587 17,5%
human resources 1673 1554 7,1%
land rent 450 417 10,0%
raw material 531 492 7,4%
human resources 1464 1356 7,4%
land rent 450 415 7,8%
raw material 763 704 34,2%
human resources 1514 1397 7,8%
land rent 450 413 8,2%
raw material 641 589 11,8%
human resources 1828 1679 8,2%
land rent 450 411 11,6%
raw material 497 454 8,7%
human resources 1620 1479 8,7%
land rent 450 375 16,7%
raw material 557 464 16,7%
human resources 1820 1516 16,7%
land rent 450 369 36,5%
raw material 420 344 18,1%
human resources 1180 967 18,1%
land rent 450 364 21,0%
raw material 542 439 19,1%
human resources 1439 1164 19,1%
land rent 450 334 25,8%
raw material 615 457 25,8%
human resources 2064 1532 30,1%
Input Reduction Minimum Maximum Average
land rent/ha 2,5% 36,5% 13,8%
raw material/ha 7,4% 34,2% 17,8%
human resources/ha 2,5% 30,1% 12,7%
DMU14
DMU4
DMU11
DMU2
DMU3
DMU15
DMU7
Descriptive
Statistics
DMU17
DMU5
DMU9
DMU1

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It is noted the DMU 6 to be the main reference for DMU 15, which is represented by
lambda equal to 0.95. The DMU 8 is the main excellence partner for most number of
DMUs, since this is the main reference to DMUs 7, 3, 5, 17, 14, 2 and 9. However, it is
observed the reference importance index of the DMU 8 for other ones are lower than
observed in the case of the DMU 6.
Table 3. Main benchmarks, inefficient farms and the
importance reference index.

The DMU 12 is considered as benchmark for DMUs 11, 4 and 1. In the case of the
DMU 1, however, the importance index of this reference is relatively low. Therefore,
for this farm, the attempt to mirror practices of the DMU 12 becomes more distant.
It is observed that the DMUs 10, 13 and 16, although effective, have not been
considered as main benchmarks for any other DMU. When analyzing the data of the
DMUs 10, 13 and 16, those three were effective, but are not near the other DMUs
concerning to dimension of their variables, therefore they do not stand as main
benchmarks.
In this study, it was also verified a relationship between crop productivity and the
profit in R$/ha, which can be described by the equation y = 24.2 x - 938.29
(R2=0.7845), Figure 2.

Figure 2. Productivity and profit from 17 farms producing sugarcane.
The sugarcane productivity varied from 76 to 114 t of industrialized stalks per hectare,
as the average productivity reaching 81 t/ha.

Main benchmarks Inefficient Farms The importance reference index
DMU6 DMU15 0,949
DMU7 0,779
DMU3 0,777
DMU5 0,729
DMU17 0,688
DMU14 0,532
DMU2 0,521
DMU9 0,517
DMU11 0,605
DMU4 0,554
DMU1 0,388
DMU8
DMU12


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Conclusions
The Data Envelopment Analysis (DEA) is presented as an important tool for analyzing
the efficiency, therefore it can be used in studies concerning to sugarcane farms. The
application of this method for analyzing those 17 farms allowed to identify in all
production factors, analyzed as input (land rent, raw material and human resources),
the possibility to implement reductions in their spending in order to reach efficiently
the input-output relationship.
Concerning to relative efficiency of the rural properties evaluated by DEA method, it
was found that, from the total 17 DMUs, six were considered as effective -
approximately 35% of the total.
The raw material is distinguished as the critical factor, for which the possible average
reduction in spending was the highest. It is also identified that some farms have
operated at low efficiency levels, whereas they should intervene and reduce their
expenses by more than 15%, such as in the cases of the DMUs 11, 2, 9 and 1. This
result indicates evident differences to occur in the performance among farms of the
same activity sector.
In this study, the Data Envelopment Analysis indicates there are farms considered as
efficient in input-output relationship. Those farms can be more intensively studied in
order to reflect their production pattern, which could be used for the development of
the other farms. Thus, further study can be conducted from the perspective of the
sucroalcoholic activity development on northeastern Minas Gerais.
It is emphasized that this study can be improved under three perspectives. The first
perspective refers to the analytic model adopted, which can be remade from the
variant returns to scale (VRS) or BCC. The second improvement would be to detail the
inputs under use, since the greater detail of the components of the raw material and
human resources could facilitate the indication of intervention for improvement. The
third possibility for improvement is the search for information in higher number of
farms, on such a way to comprise all activity in the territorial region under analysis.
The use of the DEA method helped to identify the efficient sugarcane producers as
well as to exploit their knowledge in order to improve the inefficient ones. Thus, the
implementation of procedures that would increase the useful life of the reed stand,
besides preserving the natural resources and increasing the efficiency of the land, of
the inputs and of the human resources are recommended.
References
BANKER, R. D.; COOPER, W.W.; SEIFORD, L. M.; ZHU, J. (2004). Return to scale in
DEA. In: COOPER, W.W.; SEIFORD, L.M., ZHU, J. (Eds.). Handbook on data
envelopment analysis. Boston: Kluwer Academic.
BURNQUIST, H.L. (2011). Mechanical harvesting:balance between costs and
opportunities. Abr-Jun. Available at: <http://www.revistaopinioes.com.br/aa/materia>.
Accessed: September. 2011.


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CHARNES, A., COOPER, W.W., RHODES, E. (1978). Measuring the efficiency of
decision making units. European Journal of Operational Research, 2:6 (November),
pp. 429444.
COOPER, W. W.; LI, S.; SEIFORD, L. M.; ZHU, J. (2004). Sensitivity analysis in DEA. In:
Handbook on data envelopment analysis. Boston: Kluwer Academic, chap. 3, p. 75-97.
DEMATT, J.L.I. (2005). Recuperao e manuteno da fertilidade dos solos.
Informaes Agronmicas, n. 111, set.
FERNANDES, A.C. (2000). Clculos na agroindstria da cana-de-acar. STAB.
Piracicaba, SP, Brazil.
FERREIRA, C. M. C.; GOMES, A. P. (2009). Introduo anlise envoltria de dados:
teoria, modelos e aplicaes. Viosa: Editora UFV. 389 p.
GALLARDO A.L.C.F & BOND A. (2010). Capturing the implications of land use change
in Brazil through environmental assessment: Time for a strategic approach? Environ
Impact Asses Rev.
GOLDEMBERG, J. (2007). Ethanol for a sustainable energy future. Science 9 February
2007: 315 (5813), 808-810. DOI:10.1126/science.1137013.
LINS, M.P.E.; ANGULO-MEZA, L. (2000). Anlise Envoltria de Dados e perspectivas
de integrao no ambiente de Apoio Deciso. Rio de Janeiro: COPPE/UFRJ.
MACEDO, I.C. et al. (2004). Balano das emisses de gases do efeito estufa na
produo e no uso do etanol no Brasil. So Paulo: Secretaria de Meio Ambiente do
Estado de So Paulo.
MACEDO, M. A. S.; BENGIO, M. (2003). Mensurando a Eficincia da Relao Risco x
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MAPA - Ministrio da Agricultura, Pecuria e Abastecimento (2011). Available at:
<http://www.agricultura. gov.br/ mapa>. Accessed: December.
MARTINELLI, L. A. et al. (2011). Sugar and ethanol production as a rural development
strategy in Brazil: Evidence from the state of So Paulo. Agricultural Systems [S.I.], v.
104, n. 5, p. 419-428.
MELLO, J. C. C. B. S; NGULO-MEZA, L.; GOMES, E. G.; BIONDI NETO, L. (2005).
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(2011). Sustentabilidade da produo de cana-de-acar: um estudo de caso em uma
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ONUSIC, L. M.; CASA NOVA, S. P. C.; ALMEIDA, F. C. (2007). Modelos de previso de
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brasileiras. Revista de Administrao Contempornea, v. 11, p. 77-97.
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cultura de cana-de-acar. Informaes Agronmicas, v. 97, p. 1-16.


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34. Theory of robust optimization
in overall profit efficiency with
data uncertainty
N. Aghayi
Department of Mathematics, Ardabil Branch; Islamic Azad University, Ardabil, Iran,
n.aghayi@srbiau.ac.ir (corresponding author)
M.A. Raayatpanah
School of Mathematics, Statistics and Computer Science, University of Tehran, Tehran, Iran,
raayatpanah@khayam.ut.ac.ir
Abstract
This paper presents an application of robust optimization in which data envelopment
analysis (DEA) is used to measure overall profit efficiency when data are uncertain.
When the inputs and outputs as well as the input and output price vectors of decision
making units (DMUs) in the constraints belong to an uncertain set (a set with data
uncertainty), we compute overall profit efficiency under the assumption of the worst
case scenario in relation to the uncertainty and the adjustment of the level of
robustness of the solution is also allowed to trade off performance with protection
among these uncertain elements. We show that the maximum overall profit efficiency
score may not always occur in an optimistic case and the decision maker (DM) can
obtain the maximum overall profit efficiency score corresponding to a value between
the optimistic and pessimistic cases. The results of the study have been exemplified by
real applications.
Keywords: Data Envelopment Analysis, Robust Optimization, Overall profit efficiency,
Uncertain Data.
Introduction
Data envelopment analysis (DEA) is concerned with the evaluations of performance
and it particularly deals with evaluating the activities of organizations. At first, Charnes
et al. (1978) introduced the CCR model under constant returns to scale (CRS) by
extending linear programming production. The original CCR model, was applicable
only to technologies characterized by global CRS, which was modified in the model
introduced by Banker et al. (1984) assuming variable returns to scale (VRS). In
traditional DEA, decision making units (DMUs) are evaluated by considering data
certainty, and traditional DEA is thus not able to appraise DMUs under uncertainty
conditions such as imprecision, vagueness, inconsistency, etc. Thus, the concept of
uncertainty is one of the interesting subjects in DEA. In the real world, data
uncertainty is shown in different ways, for instance, by interval, fuzzy, and stochastic
data. Sengupta (1992) was the initial DEA study which changed the traditional view of
uncertainty. Cooper et al. (1999) presented the interval approach to deal with interval

Proceedings of the 10
th
International Conference on DEA Brazil2012 278
data in DEA. Entani et al. (2002) developed a DEA model where interval efficiencies
were measured from both the optimistic and the pessimistic viewpoints.
In this paper, a robust overall profit efficiency score is presented for situations where
the inputs and outputs as well as the input and output price vectors of DMUs involve
uncertain data, which allows the degree of conservatism of the solution to be
controlled. It is indicated that the maximum overall profit efficiency score may not
always be obtained in the optimistic case and the DM can achieve the maximum
overall profit efficiency score corresponding to a value between the optimistic and
pessimistic cases. In fact, it is shown that the robust overall profit efficiency score is
better than the optimistic overall profit efficiency score in both input and output
uncertainty and price vector uncertainty.
Robust Overall Profit Efficiency (ROPE) Model with Input and
Output Uncertainty
In this section, a model is formulated, based on robust optimization, to measure the
overall profit efficiency where the inputs and the outputs of DMUs are belong to an
uncertain set (a set with input and output uncertainty). We introduce numbers
n j
x
j
1,..., = , and , 1,..., = , n j
y
j
which assume values in the interval |] | [0,
x
j
J and
|] | [0,
y
j
J , where
x
j
J and
y
j
J are the index sets of the uncertain parameters of inputs
and outputs, respectively.
x
j
and
y
j
are to adjust the robustness of the proposed
method against the level of conservatism of the solution; indeed, they impose a
budget of uncertainty in the sense that the total (scaled) variation of the parameters
cannot exceed some thresholds
x
j
and , 1,..., = , n j
y
j
and also these thresholds are
not necessarily integer-valued. The number of coefficients allowed to vary is at most
| |
x
j
J and | |
y
j
J for the inputs and the outputs respectively. Thus, our goal is to present
a model that is protected against the maximum
x
j
and
y
j
, where only one input and
one output
tj
x and
tj
y vary by at most
x
tj
x
j
x
j
]) [ ( and
y
tj
y
j
y
j
d ]) [ ( , respectively.
That is, it is assumed that only a subset of the inputs and a subset of the outputs
change to yeild the solution which was presented by Bertsimas and Sim (2004). The
robust counterpart of Model (2) is proposed as follows:
max =
o
k
) ( ( [
max
)] ) [( . .
} | | , | {
1 = 1 =
o
y
ro rj
y
j
s r
y
j
y
j
s
y
j
J
y
j
s
y
j
s
rl l
n
o l
l
ro o rj
s
r
d p
y y p t s


+



Proceedings of the 10
th
International Conference on DEA Brazil2012 279
, , 1, = 0, ))]
) ( ( ( ]) [ ( )
1 =
1 =
n j d
d p d
y
l
j
t l
n
o l
l
o
y
o
j
t j
j
t
y
j
y
j
y
rl l
n
o l
l
.
+


+ + +
+ +

) ( ( [
max
)] ) [(
} | | , | {
1 = 1 =
o
x
io ij
x
j
s i
x
j
x
j
s
x
j
J
x
j
s
x
j
s
il l
n
o l
l
io o ij
m
i
d c
x x c


(1)
, , 1, = 0, ))]
) ( ( ( ]) [ ( )
1 =
1 =
n j d
d c d
x
l
j
t l
n
o l
l
o
x
o
j
t j
j
t
x
j
x
j
x
il l
n
o l
l
. +
+ +



. , 1, = 0, 1, =
1 =
n j
j j
n
j
.


It is clear that if , 1,..., = |, =| |, =| n J J
y
j
y
j
x
j
x
j
Soysters method is obtained and if
, 1,..., = 0, = = n j
y
j
x
j
we have the nominal problem. So, we have the flexibility of
adjusting the robustness of the method against the level of conservatism of the
solution by varying
x
j
and . 1,..., = , n j
y
j
The above model is non-linear. We can
obtain the linear form of Model (1) by the proposition provided by Bertsimas and Sim
(2004), as follows:
max =
o
k
, , 1, = 0,
] ) [( . .
1 = 1 =
n j q
z y y p t s
y
rj
y
j
J r
y
j
y
j rl l
n
o l
l
ro o rj
s
r
. +
+


, , 1, = 0,
] ) [(
1 = 1 =
n j q
z x x c
x
ij
x
j
J i
x
j
x
j il l
n
o l
l
io o ij
m
i
. +
+ + +



, , 1,..., = , ) (
y
j
y
ro o rj
y
rj
y
j
J r n j d p q z + , , 1,..., = ,
1 =
y
j rj l
n
o l
l
y
rj
y
j
J r n j p q z +


, , 1,..., = , ) (
x
j
x
io o ij
x
ij
x
j
J r n j d c q z + + , , 1,..., = ,
1 =
x
j ij l
n
o l
l
x
ij
x
j
J i n j c q z +


(2)
1, =
1 =
j
n
j


. , , , 1, = 0,
0, 0, 0, 0,
x
j
y
j
x
ij
y
rj
x
j
y
j j
J i J r n j q
q z z


.


It should be mentioned that Model (2) can be applied in cases where the lower
bound of each interval input and output is non-negative.

Proceedings of the 10
th
International Conference on DEA Brazil2012 280
Model (2) is solved in two different ways for
x
j
s and
y
j
s. In the first case, the
overall profit efficiency scores of DMUs are obtained from Model (2) for each
x
j
and
y
j
that are randomly generated. Then, the mean values of these overall profit
efficiency scores are considered as the robust overall profit efficiency scores. In the
second case, the overall profit efficiency scores of DMUs are obtained from Model (2)
by increasing
x
j
and
y
j
, which change from zero to the number of the uncertain
inputs and outputs, respectively. The mean values of the overall profit efficiency
scores are given as the robust overall profit efficiency scores.
Definition 1: DMU
o
is overall profit efficient if in Model (2), 0 =
* *
.

Robust Overall Profit Efficiency (ROPE) Model with the Input and
Output Price Vectors Uncertainty
In this section, a model is formulated, based on robust optimization, to measure
overall profit efficiency with the input and output price vector uncertainty. In real
applications, it is unlikely for all coefficients of price vectors to be equal to their
nominal value; it is also unlikely for them all to be equal to their worst-case value.
Thus, it is desirable to adjust the level of conservativeness of the solution, so that a
reasonable trade-off between robustness and performance is achieved. The numbers
n j
p
j
1,..., = , and n
c
j
1,..., = , are presented, which assume values in the intervals
|] | [0,
p
j
J and |] | [0,
c
j
J , where
p
j
J and
c
j
J are the index sets of the uncertain
parameters of the output and the input prices, respectively, and they are not
necessarily integer-valued.
p
j
and
c
j
are to adjust the robustness of the proposed
method against the level of conservatism of the solution. In fact, they are the
protection level for the j -th constraint. The number of coefficients allowed to vary is
at most
p
j
and
c
j
for the output and input price vectors respectively. Thus, the main
purpose is to introduce a model that is protected against the maximum
p
j
and
c
j
,
where only one output price and only input price
tj
p and
tj
c vary by at most
p
tj
p
j
p
j
]) [ ( and
c
tj
c
j
c
j
d ]) [ ( , respectively. That is, it is assumed that only a subset of
the output price and a subset of the input price change to yeild the solution that was
presented by Bertsimas and Sim (2004). We propose the robust counterpart of Model
(5) as follows:


max =
o
d

Proceedings of the 10
th
International Conference on DEA Brazil2012 281
) ( [
max
) ( . .
1 = } | | , | {
1 = 1 =
l rl
n
l
ro
p
rj
p
j
s r
p
j
p
j
s
p
j
J
p
j
s
p
j
s
l rl
n
l
ro rj
s
r
y y d
y y p t s




+



, , 1, =
0, )] ( ]) [ (
1 =
n j
y y d
l l
j
t
n
l
o
j
t
p
j
j
t
p
j
p
j
.
+



) ( [
max
) (
1 = } | | , | {
1 = 1 =
l il
n
l
io
c
ij
c
j
s i
c
j
c
j
s
c
j
J
c
j
s
c
j
s
l il
n
l
io ij
m
i
x x d
x x c




+ +
+



(3)
, , 1, =
0, )] ( ]) [ (
1 =
n j
x x d
l l
j
t
n
l
o
j
t
c
j
j
t
c
j
c
j
.
+ +


. , 1, = 0, 1, =
1 =
n j
j j
n
j
.


The above model is non-linear. We can obtain the linear form of Model (3) using the
proposition given by Bertsimas and Sim (2004), as follows:

max =
o
d
, , 1, = 0,
) ( . .
1 = 1 =
n j q
z y y p t s
p
rj
p
j
J r
p
j
p
j l rl
n
l
ro rj
s
r
. +
+



, , 1, = 0,
) (
1 = 1 =
n j q
z x x c
c
ij
c
j
J i
c
j
c
j l il
n
l
io ij
m
i
. +
+ +



, , 1,..., = ,
p
j
p
r
p
rj
p
rj
p
j
J r n j f d q z +
, , 1,..., = ,
c
j
c
i
c
ij
c
ij
c
j
J r n j f d q z +
, 1,..., = ,
1 =
s r f y y f
p
r l rl
n
l
ro
p
r


(4)
, 1,..., = ,
1 =
m i f x x f
c
i l il
n
l
io
c
i



1, =
1 =
j
n
j



Proceedings of the 10
th
International Conference on DEA Brazil2012 282
. , , , 1, = 0,
0, 0, 0,
0, 0, 0,
c
j
p
j
c
ij
p
rj
c
i
p
r
c
j
p
j j
J i J r n j q
q f f
z z



.


Model (4) is solved for
p
j
s and
c
j
s, which are once generated randomly and once
determined by being increased step by step. In both cases, the mean value of the
overall profit efficiency scores are given as the robust overall profit efficiency scores.
Results and discussions
In this section, the robust overall profit efficiency will be explained. We consider a
problem with 4 DMUs, two inputs, two outputs, and two interval input and output
price vectors. The input, output, and nominal price vector data are taken from Cooper
et al. (2006). The data for DMUs are given in Table 1. It is assumed that all deviation
values from the nominal
rj
p and
ij
c are equal to ten, that is, 10. = =
c
ij
p
rj
d d
We solve Model (2) for different combinations of
x
j
s and
y
j
s by the generalized
algebraic modeling system (GAMS). Thirty random
x
j
s and
y
j
s are generated and
the overall profit efficiency scores for each random
x
j
and
y
j
are saved.
1
j
k is given
the robust overall profit efficiency score of a DMU using the mean of overall profit
efficiency scores. Model (2) is run for different
x
j
s increasing by 0.2 in each step
from zero up to 3 and different
y
j
s increasing from zero up to 5 with step length 0.2,
after which the values of overall profit efficiency scores are stored. The mean values
of overall profit efficiency scores are given as the robust overall profit efficiency
scores, denoted by
2
j
k . The results are provided in Table 2.
Model (4) is run for different combinations of
p
j
s and
c
j
s by the generalized
algebraic modeling system (GAMS). Ten random
p
j
s and
c
j
s are generated and
overall profit efficiency scores are stored for each random
p
j
and
c
j
. The robust
overall profit efficiency scores are determined using the mean values of overall profit
efficiency scores and are denoted by
1
j
d . Moreover, the values of
p
j
s and
y
j
s are
increased from zero to 2 with step length 0.2 and the values of overall profit
efficiency scores are stored. The mean values of overall profit efficiency scores are
presented as the robust overall profit efficiency scores, denoted by
2
j
d . The results are
given in Table 3.
Conclusions
In this paper, a deterministic methodology was proposed to address the problem of
measuring overall profit efficiency subject to the input, output, and price vector
parameters being within an uncertainty set. Using the robust optimization concept, an
equivalent model was built without uncertainty of the same class. Specifically, the

Proceedings of the 10
th
International Conference on DEA Brazil2012 283
proposed model is a linear programming problem. One of the most appealing features
of this model is that it uses very little information on the input, output, and price
vector distributions, and therefore it is widely applicable. If we only know the mean
and the variance of the distributions, the robust policy often outperforms the nominal
policy.
Acknowledgement
This research is partially supported by Ardabil Islamic Azad University.
References
Banker, R., Charnes, A., Cooper, W.W. (1984) Some models for estimating technical
and scale inefficiencies in data envelopment analysis, European Journal of Operational
Research 30 (9): 1078-1092.
Bertsimas, D., and Sim, M. (2004) The price of robustness, Operations Research 52 (1):
35-53.
Charnes, A., Cooper, W. W., Rhodes, E. (1978) Measuring the efficiency of decision
making units, European Journal of Operational Research; 2 (6): 429-444.
Cooper, W.W., Park, K.S., Yu, G. (1999) IDEA and AR-IDEA: models for dealing with
imprecise data in DEA, Management Science 45: 597-607.
Cooper, W.W., Seiford, L.M., Tone, K. Data Envelopment Analysis: A Comprehensive
Text with Models, Applications, References and DEA-solver Software. 2nd ed, New
York, Springer, (2006).
Entani, T., Maeda, Y., Tanaka, H. (2002) Dual models of interval DEA and its
extension to interval data, European Journal of Operational Research 136: 32-45.
Sengupta, J.K. (1992) A fuzzy systems approach in Data Envelopment Analysis,
Computers and Mathematics with Applications 24 (8-9): 259-266.

. 4 price nominal and output, input, : 1 DMUs for data The Table

3500 600 120 600 72 180 168 27 4
2200 480 90 450 55 160 160 25 3
1800 400 80 350 50 150 131 19 2
2010 550 100 500 90 100 151 20 1
2 1 2 1 2 1 2 1 j j j j j
p p c c O O I I DMU





Proceedings of the 10
th
International Conference on DEA Brazil2012 284
. Model(2) ith ROPE : 2 w of results The Table
. Model(4) ith ROPE : 3 w of results The Table


0.06 0.00 0.00 4
1.45 0.61 0.16 3
3.07 0.21 1.16 2
0.29 0.05 0.19 1
2 1 U
j j j j
k k k DMU

0.24 0.06 0.13 4
0.46 0.15 0.29 3
0.32 0.08 0.17 2
0.12 0.00 0.00 1
2 1 U
j j j j
d d d DMU



Proceedings of the 10
th
International Conference on DEA Brazil2012 285
35. The efficiency in Tourism
Investment capture in relation
to Highways Investment in
Tourist Routes of Esprito
Santo State, Brazil
Marta Monteiro da Costa Cruz
Federal University of Esprito Santo, Brazil, Doctor in Transport Engineering, mcruz@npd.ufes.br
Josiane Baldo
Federal University of Esprito Santo, Brazil, Master in Civil Engineering, josianebaldo@hotmail.com
Abstract
Tourism becomes a sector of more important time for economic and social
development of a country, contributing for the reduction of disparity of the regions
and favouring for its growth. The transport service, as well as road infrastructure is
essential part of tourism in order to promote movement of tourists to intended
destination. This paper presents the use of DEA to measure the efficiency in capture
of Tourism Investment in relation to Investment in Highways. Government tourism
planning of Espirito Santo State is based on eight tourist routes. Each route has an
origin in Vitoria, capital of Espirito Santo State and a final destiny that define the
route. For this study were analyzed 87 stretches road linking Vitria, to each urban
community that compose these routes. These 87 stretch roads were defined as DMU
and it was divided into two groups due to the difference in type of road, simple or
double. The inputs of this problem are distance between cities, road investment,
maintenance road investment and traffic volume. It was used tourism investment as
product. The DEA Model used was BCC oriented by product. The results achieved
shows that tourism level of investment can increase comparing with roads
investments.
Keywords: Data Envelopment Analysis, Efficiency Analysis, Highways of the Esprito
Santo, Tourism Investment and Highways
Introduction
According to Porter (1990), the infrastructure is essential to the promotion of systemic
conditions of competitiveness in service systems - transport, energy, water,
telecommunications - key to economic activity.
In the economic context, according to the Brazilian Institute of Tourism (2010), the
country reached the goal of $ 5.8 billion in international currencies generated by
tourism. In the Espirito Santo State, according to a survey conducted by the State
Secretariat of Tourism of the Espirito Santo State - SETUR in February 2010, the

Proceedings of the 10
th
International Conference on DEA Brazil2012 286
number of tourists between 2008 and 2010 in high season increased by about 47%,
resulting in an increase of 109% in average spending Tourist Routes. Regarding the
mode of transport used, approximately 84% of answers used the road to move around
to the desired destination.
In the social context, when a region has, among other issues, a road infrastructure in
perfect condition has expanded its capacity to generate employment, income
distribution, providing improved quality of life in communities. Already the tourism
sector provides an endless source of knowledge of historical, cultural and social
development of a country, state or community.
Today, Brazil ranks seventh in the ranking of nations that hold more international
events, the city of So Paulo as first place in the Americas. The country reached its
target of $ 5.8 billion in international currencies generated by tourism and, little by
little, distance themselves from stereotypes related to "exotic" (MINISTRY OF
TOURISM, 2010c).
However, the World Tourism Organization says that 75% of global tourist flows are
intra-regional, i.e., the majority of tourism takes place within the tourist region. The
eminent predominance of short-distance travel and reinforces this statement
demonstrates that the practice of domestic tourism has been gaining more importance
in the economic context of tourism.
According to the National Council of Commerce (CNC) (2008), domestic tourism in
Brazil's support base of the entire production chain of domestic tourism and presents
itself also as the vector product qualification against the national tourist international
travel market. Spraying of economic activities issued by domestic tourist movement
houses several tourist segments and forces them to get better qualification of its
products and services, preparing them well for the reception of international tourist
who usually has a higher criterion of satisfaction.
In a continental country like Brazil, tourist land transport has a significant importance -
both for its affordability among consumers, and by geographic accessibility near the
tourist destinations and products. Moreover, it is of fundamental importance for
accessibility to local natural and cultural attractions, as well as stimulating the personal
interaction between tourists, travelers and tourism professionals.
The overall goal of the work is to apply Data Envelopment Analysis - DEA to evaluate
the efficiency level of the Government to attract investment in the tourism sector,
taking into account the investment made in road stretches that give access to Tourist
Routes of Espirito Santo, Brazil. They were then identified road stretches with better
technical performance.
Espirito Santo Tourist Routes
Based on the Tourism Regionalization Plan, the State Government of the Espirito
Santo State, through the State Department of Tourism (SETUR), created since 2001, the
eight tourist routes listed below along with the cities that make up (SETUR, 2009):
. Route Capara with 11 cities
. Route Immigrants with 8 cities
. Route of the Sun and Moqueca with 5 cities

Proceedings of the 10
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. Sea Route and the Mountains with 5 cities
. Green Route and Waters with 5 cities
. Route of the Valleys and Coffee with 5 cities
. Coastal Route and Immigration with 7 cities
. Route Marble and Granite with 20 cities
Currently, the Espirito Santo State have three routes in the international market (Route
of the Sun and Stew, Sea Route and the Green Mountains and Rota and Waters).
Access to the tourist routes is done through federal highway (BR-262, which connects
with the Espirito Santo State Minas Gerais, in the east-west, BR-101 South and North,
which links the Espirito Santo State with the Rio de Janeiro and Bahia, north-south),
privatized highways (ES-060 South, known as the "Highway of the Sun", which
connects Vitoria with the south coast of the state) and non-privatized (ES-166, ES-185,
ES -490, ES-259, ES-060 North, among others) (CRUZ, JR OLIVEIRA, 2009).
Regionalization Planning Tour of the Espirito Santo State seeks to optimize and
facilitate the mobilization efforts, resources, communication and synergy of production
arrangements, seeking to consolidate the sustainable development of tourism,
revealing a set of differential highlighted with attractive, concentrated in a
geographical space delimited. These spaces must present conditions of competition
and cooperation among actors that stimulate public investment, and define market
segments to work (SETUR, 2006).
Espirito Santo Roadways
Whereas the total area of the state is 46,187 km , its road density is 14.1 km of
highway per 100 km . All seats of its 78 counties can be accessed by paved highway.
The average distance within the state, to access a paved highway, federal or state, is
6.1 km. This distance varies average 2.5 km to 23.9 km on the basis of micro-planning
of the state. During the surveys, it was found that 207.6 kilometers were in paving and
most of the roads were unpaved natural bed (ES-DER, 2009).
Identification DMUs
The road stretches linking the capital of Esprito Santo (Vitoria) to cities that make up
each route can be considered the decision-making units, homogeneous, because they
use the same vectors inputs / product with the same goal, which is road transport
carried by passenger vehicles, public transportation vehicles, transport vehicles and
cargo motorcycles, and therefore can be evaluated by their relative efficiencies, the
units identified as being able to compose the efficient production frontier.
Note that there is the existence of road stretches connecting Vitoria to a given
municipality who share inputs and outputs of another passage that connects Vitoria to
another city. This happens due to the composition of excerpts come from one or
more cities.
The decision to take as its starting point the city of Vitoria was due to several factors:
first by its geographical location, being equidistant from most cities that make up the
routes except one route to which the municipality belongs. Second factor is important

Proceedings of the 10
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International Conference on DEA Brazil2012 288
because this city be cut by BR-101, the main highway Brazilian, passing through the
metropolitan area of Greater Vitoria cities linking the capital to the northern region of
the state, the BR101 North and south cities of the region, the South BR101 The city of
Vitoria binds to the State of Minas Gerais and the cities of the region and Southwest
region of Capara by BR262 and the Highway of the Sun, ES-060, which connects the
southern coast of the state. These roads are of great importance to highway network
of Tourist Routes of the Espirito Santo State, since access to Routes must be done
largely through them.
Another important factor is the fact that Vitoria is the only county in the state to have
an airport with regular flights, making it a great receiver for tourists throughout the
state.
The road stretches analyzed vary greatly in terms of volume of traffic, flows ranging
from very low to very high flows. When observations of highway sections with flow
of vehicles of different intensities are used on the same sample, we expect problems
regarding the interpretation of the results.
Thus, one group was performed as auxiliary support the interpretation of results. The
stretches of highway linking the cities of Vitria Routes have distinct characteristics of
traffic volume. You can check that the distinction traffic volume occurs in stretches of
two-lane road. Thus were established two groups: the 1st group will be represented
by highway sections consisting solely of single lane highways, and the 2nd group
shown by road stretches composed of simple and double track trails.
DEA Variables
The initial selection was based on data availability in DER-ES on Secretariat State
Tourism of the Espirito Santo State, the Undersecretary of State Budget and the
literature review. Initially six variables were chosen to analyze the efficiency of road
stretches. Taking into consideration the opinion of experts, the relevant variables for
final analysis of efficiency of road stretches connecting Vitoria to each municipality
that make up the Tourist Routes of the Espirito Santo State were:
Inputs: Distance, investment in roads, investment in maintenance and traffic volume.
Products: Investment in tourism
In this study we adopted the BCC model (BANKER, CHARNES, COOPER, 1984) (with
variable returns to scale) product oriented, with and without restriction to weights,
using the software SIAD.
The SIAD (ANGULO MESA et al, 2005) was developed to calculate all the results of
DEA models, such as efficiencies of DMU's, weights for each of the targets,
benchmarks and clearances. Furthermore, it also provides the option of inserting
weight restrictions and the possibility of using up to 150 DMU's. Through SIAD also
can see which units work with constant returns and they work with variable returns to
scale.



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Results and discussions
In this study, it was found that the efficiency score of inefficient portions were very
low, portraying the deficiency of tourism investment over investment in roads. In the
1st group, 82% of the stretches were analyzed efficiency below 50%. In the 2nd group
this percentage was even higher, 87%. This means that the level of investment in
tourism can increase large-scale investment in roads and road maintenance support
this increase.
The road stretches efficient by default were Vitoria - Vila Velha (less distance, less
investment in roads, lower investment in road maintenance and increased investment
in tourism) and the Vitoria - Ibatiba, lower volume of vehicles.
One can see that besides the uniformity of efficiency scores of passages considered
efficient with and without restriction to weights, this uniformity is also observed in the
analysis of benchmarks with and without restriction to weights because practically the
same passages that were benchmarks without restriction to weights were also
restricted, with both the 1st group and for the 2nd group.
It is noteworthy that, despite several attempts planning and investment by the
Government in the Tourist Regions of the Espirito Santo State, is still far below what is
needed to ensure the efficiency of road stretches that give access to these routes.
Thus, one should seek to improve investment in the tourism sector, maintaining the
quality and efficiency of highways.
Conclusions
Besides the analysis of tourism investment over investment in roads, there are several
other important indicators in the analysis of efficiency Tourist Routes that have not
been included here. Therefore it is extremely important that prompted the sectors
responsible for the inclusion of indicators such as:
Number of tourists;
Index accidents on highways;
Cost of accidents on highways.
Another suggestion would be to analyze the efficiency of Tourist Routes in relation to
its infrastructure (power of attraction of the municipality, number of Beds, number of
Tourist attractions, number of positions of power, among other tourism products).
References
ANGULO MEZA, L;, BIONDI NETO, L.; SOARES DE MELLO, J.C.C.B.; GOMES, E. G.
ISYDS (2005) Integrated System for Decision Support (SIAD Sistema Integrado de
Apoio a Deciso): a software package for data envelopment analysis model. Pesquisa
Operacional, v.25, n.3, p 493-503.
BANKER, R.D.,CHARNES, A., COOPER W.W. (1984) Some models for estimating
Technical and Scale inefficiencies in Data Envelopment Analysis. Management
Science.


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CONFEDERAO NACIONAL DO COMRCIO CNC. (2008) Transporte turstico
terrestre / Confederao Nacional do Comrcio, Coordenao das Cmaras Brasileiras
de Comrcio, Cmara Brasileira de Turismo. Rio de Janeiro.
CRUZ, M. ; OLIVEIRA, R. (2009) . Rotas tursticas do Estado do Esprito Santo:
atratividades versus custos envolvidos. In: XXIII ANPET - Congresso de Pesquisa e
Ensino em Transportes, 2009, Vitria. Panorama nacional da pesquisa em transportes
2009. Vitria : ANPET, v. 1. p. 1-4.
DEPARTAMENTO DE ESTRADAS E RODAGENS DO ESPRITO SANTO- DER-ES.
(2009) Plano Estratgico de Logstica e Transportes do Esprito Santo: Componente
Rodoviro.Vitria. 6v.
MINISTRIO DO TURISMO. (2010) Turistas estrangeiros gastaram u$ 5,3 bilhes no
Brasil em 2009, 22/01/10. Disponvel em: http://www.turismo.gov.br/dadosefatos/.
Acesso em: Mar. 2010.
MINISTRIO DOS TRANSPORTES. (2010) Departamento Nacional de Infra-Estrutura
de Transportes. Rede Rodoviria do PNV: diviso em trechos 2010. Braslia, 2010.
ORGANIZAO MUNDIAL DO TURISMO, (1994) Banco de dados. Disponvel em:
<http//www.world-tourism.org>. Acesso em: Mar. 2010.
PORTER, M. (1990) The need for a new paradigm: the competitive advantage of
nations. New York: The Free Press, 1990.
SECRETARIA DE ESTADO DE TURISMO DO ESPRITO SANTO. (2008) Pesquisa de
turismo receptivo na regio metropolitana da grande Vitria alta temporada. SEBRAE:
FUTURA. Vitria, 2008.



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36. The investment in ports
enterprises in Espirito Santo,
Brazil
Karen Vassoler Martins
Federal University of Espirito Santo, Brazil, Mastering in Transport Engineering,
karenvmartins@gmail.com
Marta Monteiro da Costa Cruz
Federal University of Esprito Santo, Brazil, Doctor in Transport Engineering, mcruz@npd.ufes.br
Abstract
Considering the amount of resources needed for ports enterprises, it is important to
evaluate the level of infrastructure utilization at ports terminals to assist managers to
take decisions on improving performance or investing in increasing capacity. In this
line, this paper analyses the efficiency of available elements use at public port
terminals located at the state of Esprito Santo, Brazil, in order to obtain subsidies to
its planning and development. For this, it was made a performance comparison
between regional terminals using DEA modelling and the homogenization criteria of
DMUs presented by Bertoloto (2010). The results of the study indicate the potential for
increase cargo handling and can contribute to management decisions at the
operational and strategic level.
Keywords: Port efficiency; Port infrastructure; DEA.
Introduction
According to the Secretary of Ports (SEP, 2011), the Brazilian port sector handles
approximately 700 million tons of various goods per year, what strengthens its
importance in the major trade operations (IPEA, 2010, SEP, 2011).
In the context of Brazilian international trade, the port complex located at the state of
Esprito Santo has a prominent position (ESPRITO SANTO, 2006). In 2010, ports and
terminals that belong to that complex moved around 171.46 million tons of cargo
(SINDIEX, 2011), at about 24.00% of the total flow in the country.
Given its importance, the development of regional economy is closely linked to the
strategies of port activities. And to support the existing demand through public
terminals, it is indispensable to increase efficiency in the use of available infrastructure
(ESPRITO SANTO, 2006).
As defined in Brazilian port sector legislation, port facilities can be classified as private
or public, and public facilities can be operated by public or private companies, by
prior bidding and agreement (BRAZIL, 1993; IPEA, 2009; IPEA, 2010).
Among the elements that ensure port competitiveness there are the berths and depth,
both determinants of the size of ships that dock at the port, that also determine the

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amount of cargo handled (BERTOLOTO, 2010; IPEA, 2010). Considering the amount
of resources needed to build these elements, to know the level of use of existing
structures is important at the studies for ports and terminals expansion (WANKE,
2009a).
In this sense, the analysis of efficiency, defined as the ratio between what is produced
and what could be produced with the same resources (SOARES DE MELLO et al.,
2005), can be useful to identify the efforts to improve ports performance. And one of
the most known and used methods to get benchmarks for ports infrastructure is the
Data Envelopment Analysis (FONTES AND SOARES DE MELLO, 2006; COSTA, 2007;
PIRES et al., 2009; BERTOLOTO, 2010).
The Data Envelopment Analysis (DEA) is a technique for analysis and diagnosis based
on mathematical programming developed by Charnes, Cooper and Rhodes (1978),
that uses data input and output and the production function theory to estimate the
efficiency frontier in a set of decision-making units (SOARES DE MELLO et al., 2003;
BLONINGEN AND WILSON, 2008; WANKE, 2009 a; BERTOLOTO, 2010).
To analyze the efficiency of use of infrastructure utilization of public terminals located
at Esprito Santo and obtain information for its planning and development, this paper
presents a study of nine ports and terminals, with similar location and connectivity
with other modes, based on maximum draft allowed, total length of berths and total
amount of cargo handled, with application of DEA. According to the different forms of
exploitation which they are subjected, these ports and terminals were classified into
three groups - Direct Administration, Rented and Private - on which was used the
compensation technique for non-homogeneous units presented by Bertoloto(2010).
The results indicate that there is potential to increase cargo handling at public
terminals and suggest that specialization and form of operation of terminals
and ports influence its efficiency.
Performance measures obtained can help to identify the level of utilization of ports
and terminals, to trace the causes of inefficiencies, to define the best form of
exploitation and to take decisions on berths specialization.
Methods
This study proposes a combination of theory and practice through the application of
Data Envelopment Analysis model on a set of ports and terminals located at the state
of Esprito Santo, Brazil, to evaluate the efficiency at local public terminals
infrastructure utilization.
The DEA model chosen was BCC (BANKER et al., 1984), input-oriented.
Nine ports or terminals were analyzed at the period between the years 2008 and 2009.
Were defined as inputs the maximum draft allowed and total length of berths, both
measured in meters, and as output the total amount of cargo handled quarterly,
measured in tons (BERTOLOTO, 2010). Data were obtained from analyzed ports and
terminals and from the local Port Authority.

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Ports and terminals, each quarter, were considered a decision-making unit (DMU) in
order to facilitate the identification of seasonality interferences and economic
situations in the amount of cargo handled.
Due the different forms of exploitation the studied ports and terminals are subjected,
the set is not considered homogeneous. Because of this the units were classified in 3
distinct clusters: Direct Administration, Rented and Private, with the application of
compensation method approached by Bertoloto (2010), following the script laid out
by the author: 1) Running a DEA model isolated for each cluster; 2) Running a DEA
model with only the efficient units of each cluster and calculate the median of the
new efficiency values for each cluster; 3) Divide the outputs of DMUs of each cluster
by the average efficiency found in the previous step and 4) Running a DEA model
with all DMUs and calculate the efficiencies again. For this it was used SIAD
(Integrated System for Decision Support), version 3.0, Meza et al (2005).
Results and discussions
The study considered only ports and terminals with similar location and access
infrastructure, in order to minimize the effects of comparisons with terminals whose
hinterlands have larger markets or that are connected to more efficient modes.
It was obtained 108 DMUs, but only 104 were analyzed, since four units did not
handle any amount of cargo.
Since the goal of the study is to provide subsidies to the planning and development of
public terminals, the performance analysis focuses on the units belonging to clusters
Direct Administration and Rented. The results can help managers to take decisions
about the opportunity for specialization or diversification of cargo handling.
The average efficiencies of ports and terminals analyzed are presented in Table 1.
Performance measures, beside the output targets, suggest the potential of the
inefficient units to increase the volume of cargo handled.
Clusters Direct Administration and Rented concentrated 78.00% of DMUs with
efficiencies lower than 50.00% - 33.33% and 44.67%, respectively. Such information
can guide service level definitions of rented terminals or subsidize feasibility studies
on rent.
The comparison between inefficient terminals and benchmarks contributes to the
identification of decision factors for the best use of structures, assisting the operational
management of terminals operated directly by Public Administration and the
management of contracts for rented terminals. Such factors may be related, among
other things, to the amount of equipment, labor and storage area available.
At strategic level, this performance analysis can be used to evaluate the development
of port infrastructure and determine if a particular port is underused or not, before the
decision to expand it, and provide information for setting the direction and scope of
port activities (BERTOLOTO, 2010).




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Table 1: Summary table of average efficiencies of ports and terminals
Cluster Port / Terminal
Efficiency Average
Individual Cluster
Direct
Administration
DA1 27,57%
46,35% DA2 60,89%
DA3 50,59%
Rented
R1 67,15%
39,67% R2 9,47%
R3 42,20%
Private
P1 78,91%
57,27% P2 9,05%
P3 83,86%
Conclusions
Based on maximum draft permitted, extension of berths and total cargo handled data
of a group of regional ports and terminals, it was made an analysis of efficiency in
utilization of infrastructure of public terminals located at the state of Esprito Santo,
Brazil.
Ports and terminals were divided into three groups, according to the form of
exploitation they are subjected - Direct Administration, Rented and Private upon
which was applied the mathematical model of Data Envelopment Analysis, using the
compensation method of no homogeneous units presented by Bertoloto (2010).
In the analyzed universe the average performance of private ports is higher than that
of public terminals (Direct Administration and Rented units) and in this latter group,
no specialized terminals presented the highest percentage of DMUs with inefficiencies
lower than 50.00%. The observations suggest that specialization influences terminals
efficiencies, as already stated by Wanke (2009 b).
The results of the study contribute both to the operational management, assisting in
the identification of the determinants of low performance, and to strategic
management, as they provide important information for decision on expansion,
directing port activities and opportunity for specialization of berths.
References
Banker, R. D.; Charnes, A.; Cooper, W.W. (1984) Some models for estimating technical
and scale inefficiencies in data envelopment analysis. Management Science 30 :
1078-1092.#
Bertoloto, R. F. (2010) Eficincia de portos e terminais privativos brasileiros com
caractersticas distintas. 2010. 70 f. Dissertao (Mestrado em Engenharia de Produo)
Programa de Ps-graduao em Engenharia de Produo, Universidade Federal
Fluminense, Niteri.


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Bloningen, Beferences
. A. e Wilson, W. W. (2008) Port Efficiency and Trade Flows. Review of International
Economic, v. 16, n. 1, p. 21-36.
Brasil (1993) Lei 8.630, de 25 de fevereiro de 1993. Dispe sobre o regime jurdico da
explorao dos portos organizados e das instalaes porturias e d outras
providncias. Available from: <www.planalto.gov.br/ccivil_03/LEIS/l8630.htm>,
retrieved April 22, 2011.
Charnes, A.; Cooper, W. W.; Rhodes, E. (1978) Measuring the efficiency of decision-
making units. European Journal of Operational Research, v. 2, p. 429-444.
Costa, F. M. B. M. (2007) Uma aplicao do Mtodo de Data Envelopment Analysis
DEA para medir a Eficincia Operacional dos Terminais de Contineres. eGesta
Revista Eletrnica de Gesto de Negcios, Brasil e Espanha, v. 3, p. 105-128.
Esprito Santo (2006) Plano de desenvolvimento Esprito Santo 2025: nota tcnica:
desenvolvimento da logstica e dos transportes no Esprito Santo. Macroplan, Esprito
Santo.
Fontes, O. H. P. M.; Soares de Mello, J. C. C. B. S. (2006) Avaliao da eficincia
porturia atravs de uma modelagem DEA. In: IX Simpsio de Pesquisa Operacional e
Logstica da Marinha SPOLM 2006, Rio de Janeiro. Anais do SPOLM 2006.
IPEA. Instituto de Pesquisa Econmica Aplicada (2009) Portos brasileiros 2009:
ranking, rea de influncia, porte e valor agregado mdio dos produtos
movimentados. Rio de Janeiro.
IPEA. Instituto de Pesquisa Econmica Aplicada (2010) Portos brasileiros: diagnstico,
polticas e perspectivas. Rio de Janeiro.
Meza, L. A., Neto, L. B.; Soares de Mello, J. C. C. B.; Gomes, E. G. ISYDS (2005)
Integrated System for Decision Support (SIAD Sistema Integrado de Apoio a
Deciso): a software package for data envelopment analysis model. Pesquisa
Operacional, 2005, v.25, n.3, p. 493-503.
Pires, L. S.; Bertoloto, R. F.; Soares de Mello, J. C. C. B. S. (2009) Anlise da eficincia
de portos de carregamento de minrio de ferro. Rios International Journal on
Sciences of Industrial and Systems Engineering and Management, v.3, p. 094-01.
SEP. Secretaria de Portos da Presidncia da Repblica (2011) Sistema Porturio
Nacional. Available from: <www.portosdobrasil.gov.br/>, retrieved May 20, 2011.
SINDIEX. Sindicato do Comrcio de Exportao e Importao do Estado do Esprito
Santo (2011) Anurio do Comrcio Exterior do Esprito Santo em 2010. Available from:
<http://www.sindiex.org.br/site2008/image_upload/17563413052011anu%E1rio%20201
0%20V1.pdf>, retrieved September 08, 2011.


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Soares de Mello, J. C. C. B. S.; Meza, L. A.; Gomes, E.G.; Serapio, B. P.; Lins, M. P. E.
(2003) Anlise Envoltria de Dados no estudo da eficincia e dos benchmarks para
companhias areas brasileiras. Pesquisa Operacional, v.23, n.2, p.325-345.
Soares de Mello, J. C. C. B. S.; Meza, L. A.; Gomes, E. G.; Neto, L. B. (2005) Curso de
Anlise Envoltria de Dados. In: XXXVII Simpsio Brasileiro de Pesquisa Operacional
SBPO 2005, Gramado, Anais do SBPO 2005.
Wanke, P. F. (2009 a) Infraestrutura Porturia. In: Wanke, P. F.; Silveira, R. V.; Barros,
F. G.(eds) Introduo ao Planejamento da Infraestrutura e Operaes Porturias:
Aplicaes de Pesquisa Operacional. Atlas, So Paulo.
Wanke, P. F. (2009 b) Avaliando a eficincia dos terminais brasileiros com Anlise
Envoltria de Dados. In: Wanke, P. F.; Silveira, R. V.; Barros, F. G. (eds) Introduo
ao Planejamento da Infraestrutura e Operaes Porturias: Aplicaes de Pesquisa
Operacional. Atlas, So Paulo.

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37. Benchmarking the Efficiency of
Third Party Logistics in Brazil
Using Data Envelopment
Analysis
Lus Filipe Azevedo de Oliveira
Department of Production Engineering, Federal University of Rio Grande do Norte
luisfilipeao@hotmail.com
Mariana Rodrigues de Almeida
Department of Production Engineering, Federal University of Rio Grande do Norte
almeidamariana@yahoo.com
Abstract
This paper deals with the efficiency evaluation and analysis of 44 Third Party Logistics
(3PLs) providers working in Brazil by means of the Data Envelopment Analysis (DEA).
Since the analyzed companies have diversified sizes, the DEA model considered
variable returns to scales and was oriented to maximize the outputs of 3PLs. The use
of variable selection techniques was critical, in this research, to reach a subset of
variables with greater representativeness. As the main prac- tical result of this study, it
was possible to identify the relative efficiency of 3PLs of national range and their
return to scale. Furthermore, the results are of help in the decision making on
investments based on the enterprises capacity, considering the expected return of
each situation.
Keywords: Thrid Party Logistics, Efficiency, Variable Return to Scale
Introduction
The process of partial or total outsourcing of logistics operations is characterized by
using outside companies to perform typical Third Party Logistics (3PLs) provider
functions, which traditionally used to be performed by the companies themselves
(Sohail and Sohal, 2003; Kayakutlu and Buyukozkan, 2011). This trend is generally
found among the organizations that seek, by outsourcing nonessential activities, the
reduction of internal costs and the service level increase through a raise in the supply
chain management efficiency (Min and Joo, 2006; Seth, et al., 2006).
In accordance with this worldwide phenomenon, a fast growth of logistics activities
has been observed in Brazil, which led companies to reach new competitive levels in
several economies dimensions (Wanke and Affonso, 2011). However, even with an
accelerated growth and with improvements in the national supply chain, Brazil still
has low efficiency when compared to medium or high developed countries (Wanke
and Fleury, 2006).

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This paper evaluates the efficiency of 44 3PLs working in Brazil, using Data
Envelopment Analysis (DEA). DEA is a non-parametric technique that uses linear
programming to calculate the relative efficiency of a set of similar organizations, which
differ in the inputs and outputs arrangement of their processes. The method results in
a complete ranking, beyond the dichotomized classification of efficient or inefficient,
in order to refine the evaluation of the units. Furthermore, it provides a parameter to
increase the performance of inefficient organizations, showing how they should
evolve to achieve business performance comparable to benchmark enterprises in the
market (Adler, et al., 2002; Cooper et al., 2006; Cook and Seiford, 2009).
This paper presents a framework on three pillars: i) integration of the theme of
logistics and data envelopment analysis, ii) research methods, iii) results of the
analysis.
Efficiency Measurement of Third Party Logistics Providers
The efficiency study of Third Party Logistics (3PLs) providers by means of the Data
Envelopment Analysis (DEA) have had great prominence in current literature (Min and
Joo, 2006; Ding, et al., 2008; Hamdan and Rogers, 2008; Zhou, et al., 2008; Koster, et
al., 2009; Liu and Fu, 2009; Wanke and Affonso, 2011). This fact occurs due to the role
of 3PLs as leverage for the industry development, facing the complex relationships
that exist along the supply chain.
One of the first studies linking efficiency evaluation to 3PLs was conducted by Min
and Joo (2006), developing a meaningful set of financial benchmarks that dictates best
practices, though DEA analysis, applying a non-linear fractional program. The
proposed DEA model helps 3PLs identify potential sources of inefficiency and provide
useful hindsight for the continuous improvement of operational efficiency.
Furthermore, helps 3PLs establish detailed policy guidelines in prioritizing the use of
financial resources and evaluate the effects of financial investment on the profitability
of 3PLs.
Ding, et al. (2008) explain that the traditional DEA model evaluates decision making
units (DMU) from the most beneficial perspective to them, which easily leads to
unreasonable weight assignment. To solve this problem, an improved DEA model
with upper-limit and lower-limit confidence region constraint has been established
based on information entropy. In this context, the paper established an Information
Entropy-DEA model to evaluate 7 logistics suppliers from china.
Hamdan and Rogers (2008) introduce DEA as a tool to evaluate the efficiency of a
group 19 warehouse logistics working in the United States. The relative efficiency
scores for the warehouses used in the study were analyzed before and after the use of
weight restrictions. As a result, it was possible to determine the impact of each input
and output on the efficiency of each warehouse, and also, to examine specific
warehouse characteristics and develop a set of recommendations in the improvement
and design of more efficient operations.
The purpose of Zhou, et al. (2008) was to develop a benchmark for performance
standards for 3PLs in the emerging market. The authors identify the factors that

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significantly affect the operational efficiency of the Chinese 3PLs, proposing different
ways to improve the competitiveness of them. In particular, it develops both the
Constant Return to Scale (CRS) and the Variable Return to Scale (VRS) model and also
uses step-wise regression analysis to identify factors influencing the performances of
Chinese 3PLs.
In a different perspective, Koster, et al. (2009) applied DEA on primary data of 38
large container terminals in Europe and compared efficiency scores from the
benchmarking exercise with those of previous studies, discussing the reasons behind
diverging results. The authors show that DEA may be appropriate for container
terminal benchmarking, but only if better quality and additional input and output data
can be obtained.
Liu and Fu (2009) compared the results of CRS and VRS input oriented DEA models,
calculating both the technical efficiency and scale efficiency, and also the returns to
scale for each of the 16 logistics public companies from China. By comparing the
efficiency of logistics companies, they could contribute to find the 3PLs weaknesses in
order to take effective measures to improve their level of input and output so as to
improve its logistics efficiency.
Wanke and Affonso (2011) studied the 3PLs industry in Brazil. Its main objective was
to determine the variables that significantly impact on the 3PL scale efficiency by
means of a two-stage DEA. The inputs and outputs required for this analysis were
identified as well as the contextual variables that may impact on the 3PL scale
efficiency. The results corroborate the evidence in the literature on the role of
coordination processes in logistics performance.
Methodology
The research was conducted with data from the special issue Operadores Logsticos
(2011), published annually by the brazilian magazine Tecnologstica, which shows the
main companies from the Third Party Logistics (3PLs) providers market in Brazil. The
analysis contemplates the universe of companies working in Brazil and different sized
businesses.
The analysis took into account four input variables, as follows: i) number of
employees; ii) total area used for storage; iii) number of warehouses owned by the
companies; and iv) number of warehouses within the client facilities. As a result of the
outputs, the following variables were considered: i) number of customers under
contract; ii) companys operating revenue; iii) total managed products volume; and iv)
revenue growth presented by the company as compared with the previous year.
According to Dyson, et al. (2001), the set of Decision Making Units (DMU) must be
homogeneous regarding to the activities they perform, being able to run similar tasks
with the same goals and also presenting the same inputs and outputs, with varying
intensity of these variables. In other words, the DEA methodology requires common
variables among the 3PLs to compare them, making it necessary to obtain a list of
organizations, limited by data availability. In that sense, a sample of 44 3PLs was

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extracted from the original set of 126 companies, taking as selection criteria those that
provided the information relevant to the chosen input and output variables.
The DEA model was oriented to maximize the outputs of 3PLs and considered
variable returns to scales, since the analyzed companies have different sizes and
thereby have technologies with constant, increasing and decreasing returns to scale.
This model was first proposed by Banker, et al. (1984) and, for such conditions, can
be described as Expression 1.
Min


0
+
0

=1

(1)
Subject to:

=1
= 1

=1

0

=1
0;
= 1, , ,

0; = 1, , ;
= 1, , .
Here the y
rj
and x
ij
, all positive, are the known outputs and inputs from a set of j =
1,, n organizations. The data y
rj
and x
ij
are constants and will usually be
observations from past decisions on inputs and the outputs that resulted therefrom.
The variables v
i
, u
r
0 are weights to be determined by the solution of this problem,
by the data on all of the DMU's which are being used as a reference set. It is worth
noting the presence of variable v
0
, representing the return to scale presented by the
analyzed unit 0, determining whether the operations are conducted with increasing,
constant or decreasing returns to scale. Thus, in case v > 0, returns to scale are
decreasing; if v = 0, returns are constant; and if v < 0, returns will be increasing.
The efficiency measure of any DMU is obtained as the inverse of the minimum of the
weighted inputs and rated relative to the others from the set that accords the most
favorable weighting that the constraints allow. Thus, the weights are objectively
determined to obtain a scalar measure of efficiency in any case. The constraints
provide that ratios of weighted outputs to weighted inputs for every DMU be less than
or equal to unity.
Efficiency of Third Party Logistics in Brazil
The quantitative analysis of this research considers the parameters to evaluate the
efficiency of Third Party Logistics (3PLs) providers in Brazil, with a practical
and measurable focus. The purpose of this analysis is to access and compare the
measurable parameters of 3PLs by the link among the conditions offered by them
such as inputs and/or supplies and their volume and productivity responses as
output and/or products triggered.

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According to the proposed model, it was obtained an average technical efficiency of
75.74%, a minimum efficiency rate of 13.14% and the standard deviation (SD) for the
sample was 28.05. The results show that 20 3PLs were classified as efficient since their
efficiency score were 100%, which implies the inefficiency status for 24 3PLs, that
represents 55% of the sample (Table 1).
Table 1: Performance evaluation of 3PLs
Performance Evaluation
Average 75.74%,
SD 28.05
Minimum 13.14%
100% 20
99 70% 7
69 40% 9
Low 39% 8
Using the company's size classification adopted by the Banco Nacional do
Desenvolvimento (BNDES, which in a free translation means National Development
Bank), that considers the Annual Gross Revenue, its possible to note that, among the
successful firms, six are small (30%), three are medium-sized companies ( 15%), seven
are medium to large (35%) and four are large companies (20%).
Each return to scale phase presents a specific denotation to support the results, helps
in the decision making on investments based on the enterprises capacity, considering
the expected return of each situation (Table 2). The increasing scale implies that in
raising input variables, a large (disproportional) increase in output variables for the 11
companies that present this kind of return to scale. Therefore, to invest on capacity
growth of these companies is attractive because it would bring a rapid growth in
national performance, provided by economies of scale likely to be achieved for 25%
of 3PLs examined.

Table 2: Evaluation of the scale of 3PLs
Return to
Scale
Scale Evaluation
Total
Efficiency
100% <100%
Increasing 11 5 6
Constant 0 0 0
Decreasing 33 15 18

Proceedings of the 10
th
International Conference on DEA Brazil2012 302
Considering the efficiency score of this group, the result shows that five companies
that are technically efficient presented increasing scale of production, indicating
that despite the absence of inputs in excess, the production volume is below the
optimal range. This means that such units can increase production by raising the
amount of resources required, moving the efficiency frontier away from the analyzed
group.
Noting the inefficient firms that have an increasing return to scale, they represent six
organizations on the sample. These companies operate below optimal scale, and
such units can also increase their production level by raising the amount of resources
to achieve the optimum efficiency.
Running on a decreasing scale, with 33 3PLs from the sample, the resources used
exceed the optimum level. It is not recommended to obtain more resources to
increase the production capacity by 75% of firms, but to reduce the excesses. These
aspects would bring benefits proportionately lower than the rates of resources
increasing.
The 15 units that are efficient and have decreasing returns to scale operate above
the optimal scale, which implies the need to reduce its volume of production,
considering that the increase in production occurs in this situation by adding a larger
quantity of inputs needed, which becomes economically unattractive. Therefore, to
achieve optimum efficiency, it is necessary to reduce the excessive use of
input, maintaining the production level.
Finally, it is observed that 18 organizations are inefficient and have decreasing
returns to scale. To increase their technical efficiency, these companies must eliminate
the use of excess raw materials, while increasing the production level.
Results and Conclusions
The growth of the logistics operations complexity and the demand for efficiency gains
in performing such tasks led to the Third Party Logistics (3PLs) providers appearance.
These are companies that take a strategic role within organizations, since they allow
costs to be reduced and help improve service level.
This paper focused on the efficiency evaluation and analysis of 44 3PLs in operation
in Brazil by means of the Data Envelopment Analysis (DEA). As the main practical
result of this study, it was possible to identify the relative efficiency of 3PLs of national
range and their return to scale. Based on the constructed model results, 20 3PLs were
identified as efficient and representative of national benchmarks by their optimal
relationship between productivity and resource usage.
About the scale in which each 3PLs operates, it was identified that 11 work on an
increasing scale and 33 on a decreasing scale, with no occurrence of constant
performance. These results are helpful in making decisions on investments based on
the enterprises capacity, considering the expected return of each situation.

Proceedings of the 10
th
International Conference on DEA Brazil2012 303
When faced with these results, managers can select the best players concerning the
efficiency of production processes based on a ranking that lists the best 3PLs and
assess the efficiency regarding its strategic objectives, in order to drive companies to
best practices and superior performance.
Therefore, these results help organizations in making decisions regarding resources
allocation in order to optimize and distribute them to the appropriate channels, which
justifies the use of DEA as a tool to contribute to the 3PLs pursuit of excellence.
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Proceedings of the 10
th
International Conference on DEA Brazil2012 305



DATA ENVELOPMENT ANALYSIS: THEORY AND
APPLICATIONS
10
th
International Conference on Data Envelopment Anal ysis
(DEA2012)












ISBN: 978 185449 437 5




International Data Envelopment
Analysis Society

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