Title: Incorporating heterogeneity in non-parametric models: a methodological comparison

Authors: Kristof De Witte, Rui Cunha Marques

Addresses: Center for Economic Studies (CES), University of Leuven, Naamsesstraat 69, Leuven 3000, Belgium; Top Institute for Evidence Based Education, Maastricht University, Tongersestraat 53, Maastricht 6211, The Netherlands. ' Centre of Urban and Regional Systems (CESUR), IST, Technical University of Lisbon, Avenida Rovisco Pais, Lisbon 1049-001, Portugal

Abstract: The operational environment can heavily influence the efficiency scores of the evaluated observations. If heterogeneity among entities is neglected, the efficiency evaluation is strongly biased. In this paper, we discuss five methodologies to incorporate heterogeneity in non-parametric frontier models which are robust for outlying observations. In particular, we examine the frontier separation approach, the all-in-one model, the two-stage model, the multi-stage approach and the conditional efficiency measures. We discuss their appropriateness on a simulated and a real-world drinking water data set. Although, the outcomes are closely related on average, the robust conditional efficiency procedure seems to be superior.

Keywords: environmental variables; DEA; data envelopment analysis; FDH; free disposal hull; heterogeneity; non-parametric models; water industry; efficiency scores; modelling; drinking water.

DOI: 10.1504/IJOR.2010.035044

International Journal of Operational Research, 2010 Vol.9 No.2, pp.188 - 204

Published online: 01 Sep 2010 *

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