How can we measure and compare the relative performance of production units? If input and output variables are one dimensional, then the simplest way is to compute efficiency by calculating and comparing the ratio of output and input for each production unit. This idea is inappropriate though, when multiple inputs or multiple outputs are observed. Consider a bank, for example, with three branches A, B, and C. The branches take the number of staff as the input, and measures outputs such as the number of transactions on personal and business accounts. Assume that the following statistics are observed:
Productivity analysis provides a systematic approach to
these problems. We review the basic concepts of productivity
analysis and two popular methods DEA and FDH, which are given in
Sections 12.1 and 12.2, respectively. Sections 12.3
and 12.4 contain illustrative examples with real data.