Interpreting inefficiency ratings: An application of bank branch operating efficiencies

Abstract

Data Envelopment Analysis is an analytical tool for evaluating the relative technical efficiency of a set of organizations with the same multiple inputs and outputs. This paper examines the correct interpretation of inefficiency scores in the Additive model of Data Envelopment Analysis. A contrived numerical example is offered to demonstrate that certain computational statements appearing in recent literature are not entirely correct. As rectification, a region of stability is defined that identifies sufficient conditions for altering a technical inefficiency classification to that of technical efficiency. Finally, this region of stability technique is applied to bank branch operating efficiencies to demonstrate managerial interpretations and policy implications.