Efficiency Evaluations Based on Potential (Non-Proportional) Improvements

Efficiency evaluation of a Decision Making Unit (DMU) involves two issues: 1) selection of an appropriate reference plan against which to evaluate the DMU and 2) measurement of performance slack. In the literature, these issues are mixed in one and the same operation but we argue that it has theoretical as well as practical advantages to separate them. We provide an axiomatic characterization of the implicit Farrell selection. This approach, ignores important aspects of the technology by focussing on proportional variations in inputs (or outputs). We propose a new approach where potential improvements are used to guide the selection of reference plans. A characterization of this approach is provided and an associated translation invariant, strictly monotonous and continuous efficiency index is suggested. Copyright Kluwer Academic Publishers 1999