Evaluating eco-efficiency with data envelopment analysis : an analytical reexamination
Date of Issue2013
College of Business (Nanyang Business School)
This paper reexamines the unintended consequences of the two widely cited models for measuring environmental efficiency—the hyperbolic efficiency model (HEM) and directional distance function (DDF). I prove the existence of three main problems: (1) these two models are not monotonic in undesirable outputs (i.e., a firm’s efficiency may increase when polluting more, and vice versa), (2) strongly dominated firms may appear efficient, and (3) some firms’ environmental efficiency scores may be computed against strongly dominated points. Using the supply-chain carbon emissions data from the 50 major U.S. manufacturing companies, I empirically compare these two models with a weighted additive DEA model. The empirical results corroborate the analytical findings that the DDF and HEM models can generate spurious efficiency estimates and must be used with extreme caution.
Annals of operations research
© 2013 Springer Science+Business Media New York. This is the author created version of a work that has been peer reviewed and accepted for publication by Annals of Operations Research, Springer Science+Business Media New York. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1007/s10479-013-1488-z].