Individual rationality and overall fairness in fixed cost allocation: An approach under DEA cross-efficiency evaluation mechanism

Abstract

This paper develops a new fixed cost allocation (FCA) approach that considers individual rationality and fairness using the data envelopment analysis (DEA) cross-efficiency evaluation. We propose two FCA principles from individual rationality: a novel self-lowest principle and the efficient after FCA principle. Under the precondition that the individual rationality principles are satisfied, we suggest determining the final FCA result based on two overall fairness principles: the lower bound principle and the cross-efficiency Pareto-optimality principle. A multi-objective FCA model is built following these principles. An algorithm and some rules are used to solve the multi-objective model and obtain the final cross-efficiency evaluation and FCA result. Our study contributes by explicitly showing the design of individual rationality and overall fairness in FCA using the DEA cross-efficiency evaluation mechanism. Finally, we compare the suggested approach with some previous ones using a numerical example and illustrate its usefulness through a truck fleet case study.