Decomposing capacity utilization in data envelopment analysis: An application to banks in India |
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Authors: | Biresh K Sahoo Kaoru Tone |
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Institution: | 1. Amrita School of Business, Amrita Vishwa Vidyapeethem, Ettimadai Post, Coimbatore 641 105, India;2. Institute for Monetary and Fiscal Policy, Vienna University of Economics and Business Administration, Augasse 2-6, 1090 Vienna, Austria;3. National Graduate Institute for Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo 106-8677, Japan |
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Abstract: | This paper briefly reviews the existing methods of capacity utilization in nonparametric framework from economic perspectives, and then suggests an alternative in the light of limitations therein. In the spirit of work by Coelli et al. Coelli, T.J., Grifell-Tatje, E., Perelman, S., 2002. Capacity utilisation and profitability: A decomposition of short run profit efficiency. International Journal of Production Economics 79, 261–278], we propose two methods, radial and non-radial, to decompose the input-based physical (technological) capacity utilization into various meaningful components viz., technical inefficiency, ray economic capacity utilization and optimal capacity idleness. A case study of Indian banking industry is taken as an example to illustrate the potential application of these two methods of decomposition. Our two broad empirical findings are that first, competition created after financial sector reforms generates high efficiency growth, and reduces excess capacity; second, the cost gap of the short-run cost from the actual cost is higher for the nationalized banks over the private banks indicating that the former banks, though old, do not reflect their learning experience in their cost minimizing behavior. |
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Keywords: | Capacity utilization Technical efficiency Optimal idle capacity DEA |
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