Data envelopment analysis: From non-monotonic to monotonic scale elasticities

Abstract

The concept of returns to scale (RTS) or local scale elasticities in data envelopment analysis (DEA)—stemming from variable returns to scale (VRS) technology—has been recently criticized because of its misbehavior in the case of decreasing returns to scale (DRS). Here, the instrument should imply a downsizing force for improving productivity. In classical VRS technologies, however, it can hide respective improvement potentials: the more, the larger a company is. The non-monotonic behavior of local scale elasticities can address this effect. This study shows this phenomenon does not apply when using multiplicative DEA models. Therefore, we propose a new global scaling index that works in the classical VRS technology. We prove the new index is weakly monotonic and illustrate our theoretical findings in a banking context.