DEA with Undesirable Factors

Abstract

The standard Data Envelopment Analysis (DEA) models rely on the assumption that inputs are minimized and outputs are maximized. However, when some inputs or outputs are undesirable factors (e.g., pollutants or wastes), these outputs (inputs) should be reduced (increased) to improve inefficiency. This chapter discusses the existing methods of treating undesirable factors in DEA. Under strongly disposable technology and weakly disposable technology, there are at least three approaches of treating undesirable outputs in the DEA literature. The first approach is the hyperbolic output efficiency measure that increases desirable outputs and decreases undesirable outputs simultaneously. Based on the classification invariance property, a linear monotone decreasing transformation is used to treat the undesirable outputs. A directional distance function is used to estimate the efficiency scores based on weak disposability of undesirable outputs. This chapter also presents an extended DEA model in which undesirable outputs and non-discretionary inputs are considered simultaneously.