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A decision-oriented approach to performance measurement

Providing an insight into the DEA efficiency of banking institutions


Minh Hanh Le

Within the performance measurement theme, this book contributes a new decision-oriented perspective to evaluate the efficiency of organizations. This perspective defines an efficient organization as the one which attains the rationality in the operating process to generate its desired values. From this angle, the book identifies the pitfalls regarding the input-output specification in bank efficiency assessments using Data Envelopment Analysis (DEA) models. It introduces the Decision-oriented Performance Measurement framework grounded in management rationality concepts as a solution to avoid these pitfalls. For empirical evidence, the book presents a goal-oriented DEA efficiency analysis of German savings bank sector.
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Chapter 2: An insight into the specification of performance criteria in DEA models for measuring bank efficiency



Abstract Data Envelopment Analysis (DEA) has become one of the most widely used instruments for measuring operational performance. However, its application encounters many problems, which is evidenced by continuous evolvements in the DEA method so far. This study examines the DEA applications for measuring bank efficiency, with focus on the specification of performance criteria. The primary objective is to identify the pitfalls resulted from the use of input and output factors as performance criteria in DEA models for measuring bank efficiency. Four bank behavior models which are most popularly employed to determine input and output factors in DEA studies – the intermediation approach, production approach, user cost approach and value added approach – are comprehensively discussed and reviewed. The comparative reflection on the bank behavior models and the conventional DEA models shows that the input-output related pitfalls of a DEA application are associated with its implicitly fixed preference structure, flexible weight determination and limited explanatory power. Due to the pitfalls, DEA models may fail to capture bank behaviors. In such cases, DEA results can hardly reflect the performance in its true sense, i.e. how banks perform against the goals that they decide to pursue. The findings suggest that decision making theory can shed a new light to this issue.

2.1 Introduction

This study was triggered by questioning the dual role of deposits in the bank efficiency studies applying DEA measurement method. Deposits have been assigned as both input factors and output factors5 of banks in...

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