Fixed cost allocation based on the principle of efficiency invariance in two-stage systems

Qingxian An, Ping Wang, Ali Emrouznejad and Junhua Hu

European Journal of Operational Research, 2020, vol. 283, issue 2, 662-675

Abstract: Fixed cost allocation among groups of entities is a prominent issue in numerous organisations. Addressing this issue has become one of the most important topics of the data envelopment analysis (DEA) methodology. In this study, we propose a fixed cost allocation approach for basic two-stage systems based on the principle of efficiency invariance and then extend it to general two-stage systems. Fixed cost allocation in cooperative and noncooperative scenarios are investigated to develop the related allocation plans for two-stage systems. The model of fixed cost allocation under the overall condition of efficiency invariance is first developed when the two stages have a cooperative relationship. Then, the model of fixed cost allocation under the divisional condition of efficiency invariance wherein the two stages have a noncooperative relationship is studied. Finally, the validation of the proposed approach is demonstrated by a real application of 24 nonlife insurance companies, in which a comparative analysis with other allocation approaches is included.

Keywords: Data envelopment analysis; Fixed cost allocation; Cooperative model; Noncooperative model; Efficiency invariance principle (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:283:y:2020:i:2:p:662-675

DOI: 10.1016/j.ejor.2019.11.031

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