Data Envelopment Analysis Development in Banking Sector

Background

Efficiency measurement originates from the definition of efficiency of DMU by Koopmans (1951) and Debreu (1951).They stated that DMU is efficient when producing one more unit of any output results in using more of some inputs or producing less of some outputs. For measuring the radial distance of DMU from the frontier, Debreu (1951) introduced output-expanding direction distance function while Shepherd (1956) introduced input-conserving direction distance function. Farrell (1957) presented efficiency measure as the product of allocated efficiency and technical efficiency. Using his idea, frontier approaches have been developed in two groups; parametric and non-parametric approaches. Based on these two approaches numerous models with different applications to a variety of industries were developed. Depending on the availability of data and the reason for efficiency measurement, scholars choose different models for their research. Table 1 illustrates the methods developed according to these two approaches.