Data envelopment analysis with stochastic data

Data envelopment analysis (DEA) has proven to be a useful technique in evaluating the efficiency of decision making units that produce multiple-outputs using multiple-inputs. However, the ability to estimate efficiency reliably is hampered in the presence of measurement error and other statistical noise. A main and legitimate criticism of all deterministic models is the inability to separate out measurement error from inefficiency, both of which are unobserved. In this paper, we consider panel data models of efficiency estimation. One DEA model that has been used averages cross-sectional efficiency estimates across time and has been shown to work relatively well. In this paper, it is shown that this approach leads to biased efficiency estimates and provide an alternative model that corrects this problem. The approaches are compared using simulated data for illustrative purposes.