A Value Efficiency Approach to Incorporating Preference Information in Data Envelopment Analysis

Merja Halme, Tarja Joro, Pekka Korhonen, Seppo Salo and Jyrki Wallenius
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Merja Halme: Helsinki School of Economics and Business Administration, Department of Economics and Management Science, Runeberginkatu 14--16, 00100 Helsinki, Finland
Tarja Joro: Helsinki School of Economics and Business Administration, Department of Economics and Management Science, Runeberginkatu 14--16, 00100 Helsinki, Finland
Seppo Salo: Helsinki School of Economics and Business Administration, Department of Economics and Management Science, Runeberginkatu 14--16, 00100 Helsinki, Finland

Management Science, 1999, vol. 45, issue 1, 103-115

Abstract: We develop a procedure and the requisite theory for incorporating preference information in a novel way in the efficiency analysis of Decision Making Units. The efficiency of Decision Making Units is defined in the spirit of Data Envelopment Analysis (DEA), complemented with Decision Maker's preference information concerning the desirable structure of inputs and outputs. Our procedure begins by aiding the Decision Maker in searching for the most preferred combination of inputs and outputs of Decision Making Units (for short, Most Preferred Solution) which are efficient in DEA. Then, assuming that the Decision Maker's Most Preferred Solution maximizes his/her underlying (unknown) value function, we approximate the indifference contour of the value function at this point with its possible tangent hyperplanes. Value Efficiency scores are then calculated for each Decision Making Unit comparing the inefficient units to units having the same value as the Most Preferred Solution. The resulting Value Efficiency scores are optimistic approximations of the true scores. The procedure and the resulting efficiency scores are immediately applicable to solving practical problems.

Keywords: efficiency analysis; data envelopment analysis; multiple criteria decision making; value function (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (105)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:45:y:1999:i:1:p:103-115

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