Economic Theory and DEA

Recently the nonparametric techniques of efficiency measurement known as data envelopment analysis (DEA) have been frequently applied in economic studies of productivity. The DEA models compare the performance of a decision-making unit (DMU) or a firm with a standard measure. The standard measure, constructed in various ways through suitable linear programming (LP) models yields potential or frontier output. The difference between the firm’s actual output and its potential output enables one to arrive at a measure of the firm’s technical efficiency. Recent applications of DEA models include the comparisons of the British prison system by Ganley and Cubbin (1992), the information theory applications by Sengupta (1993) and the various public and private sector applications by Fried et al. (1993).