Analyzing the accuracy of variable returns to scale data envelopment analysis models

Abstract

The data envelopment analysis (DEA) model is extensively used to estimate efficiency, but no study has determined the DEA model that delivers the most precise estimates. To address this issue, we advance the Monte Carlo simulation-based data generation process proposed by Kohl and Brunner (2020). The developed process generates an artificial dataset using the Translog production function (instead of the commonly used Cobb Douglas) to construct well-behaved scenarios under variable returns to scale (VRS). Using different VRS DEA models, we compute DEA efficiency scores with artificially generated decision-making units (DMUs). We employ five performance indicators followed by a benchmark value and ranking as well as statistical hypothesis tests to evaluate the quality of the efficiency estimates. The procedure allows us to determine which parameters negatively or positively influence the quality of the DEA estimates. It also enables us to identify which DEA model performs the most efficiently over a wide range of scenarios. In contrast to the widely applied BCC (Banker-Charnes-Cooper) model, we find that the Assurance Region (AR) and Slacks-Based Measurement (SBM) DEA models perform better. Thus, we endorse the use of AR and SBM models for DEA applications under the VRS regime.