Returns to Scale as an Established Scaling Indicator: Always a Good Advisor?

Dellnitz Andreas () and Rödder Wilhelm
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Dellnitz Andreas: FernUniversität in Hagen, Universitätsstraße 41, 58097 Hagen, Germany
Rödder Wilhelm: FernUniversität in Hagen, Universitätsstraße 41, 58097 Hagen, Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2021, vol. 241, issue 2, 173-186

Abstract: In data envelopment analysis (DEA), returns to scale (RTS) are a widely accepted instrument for a company to reveal its activity scaling potentials. In the case of increasing returns to scale (IRS), a company learns that upsizing activities improves its productivity. For decreasing returns to scale (DRS), the instrument likewise should depict a downsizing force, again for improving productivity. Unfortunately, here the classical RTS concept shows misbehavior. Under certain circumstances, it is the wrong indicator for scaling activities and even hides respective productivity improvement potentials. In this paper, we study this phenomenon, using the DEA concept, and illustrate it via little numerical examples and a real-world application consisting of 37 Brazilian banks.

Keywords: scaling decisions; returns to scale; RTS misbehavior; banking sector; data envelopment analysis (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:241:y:2021:i:2:p:173-186:n:6

DOI: 10.1515/jbnst-2019-0058

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