The impact of non-discretionary factors on DEA and SFA technical efficiency differences.

Abstract

The purpose of this study was to examine if factors of the external operating environment can explain differences in technical efficiency derived from Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA). In a sample of 124 dialysis facilities, technical efficiency was compared according to ownership, region, years in operation and size. With second-stage Tobit regression, DEA and SFA efficiency was regressed against these environmental factors to determine their potential for predicting technical efficiency, as well as the efficiency differences between the two frontier methods. DEA expectedly generated lower mean efficiency scores than SFA (68.2% vs. 79.4%, P < 0.001), due to the "random effects" term computed by the latter, in addition to "true" inefficiency. This finding was consistent for the subgroups formed on the basis of the environmental factors. Half the variation in the DEA-SFA efficiency differences was explained by environmental factors. This suggests that in addition to market instabilities, luck, and other related phenomena, decision-makers in their effort to determine optimal resource allocation, should point their attention to the potentially useful insight provided by environmental factors.