History
In microeconomic production theory a firm's input and output combinations are depicted using a production function. Using such a function one can show the maximum output which can be achieved with any possible combination of inputs, that is, one can construct a production technology frontier. (Seiford & Thrall 1990). Some 30 years ago DEA (and frontier techniques in general) set out to answer the question of how to use this principle in empirical applications while overcoming the problem that for actual firms (or other DMUs) one can never observe all the possible input-output combinations.
Building on the ideas of Farrell (1957), the seminal work "Measuring the efficiency of decision making units" by Charnes, Cooper & Rhodes (1978) applies linear programming to estimate an empirical production technology frontier for the first time. In Germany, the procedure was used earlier to estimate the marginal productivity of R&D and other factors of production (Brockhoff 1970). Since then, there have been a large number of books and journal articles written on DEA or applying DEA on various sets of problems. Other than comparing efficiency across DMUs within an organization, DEA has also been used to compare efficiency across firms. There are several types of DEA with the most basic being CCR based on Charnes, Cooper & Rhodes, however there are also DEA which address varying returns to scale, either CRS (constant returns to scale) or VRS (variable). The main developments of DEA in the 1970s and 1980s are documented by Seiford & Thrall (1990).
Read more about this topic: Data Envelopment Analysis
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