Accepted Manuscript

Stochastic ranking and dominance in DEA

Mostafa Davtalab-Olyaie, Masoud Asgharian, Vahid Partovi Nia

PII: S0925-5273(19)30127-6
DOI: https://doi.org/10.1016/j.ijpe.2019.04.004
Reference: PROECO 7345

To appear in: International Journal of Production Economics

Received Date: 20 January 2018

Revised Date: 2 February 2019
Accepted Date: 9 April 2019

Please cite this article as: Davtalab-Olyaie, M., Asgharian, M., Nia, V.P., Stochastic ranking and
dominance in DEA, International Journal of Production Economics (2019), doi: https://doi.org/10.1016/
j.ijpe.2019.04.004.

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 ACCEPTED MANUSCRIPT

Stochastic Dominance in Data Envelopment Analysis

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Mostafa Davtalab-Olyaie ∗, Masoud Asgharian†, and Vahid Partovi Nia‡

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Abstract

Data Envelopment Analysis (DEA) requires deterministic input/output data for effi-

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ciency evaluation of a set of Decision Making Units (DMUs). When there are more
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than one set of input/output data for each DMU, however, such requirement is infeasi-
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ble. Stochastic DEA (SDEA), where input/output data are assumed to be stochastic,

is a natural approach for such applications. Performance evaluation of DMUs in SDEA

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naturally calls for ranking methods that can account for stochastic fluctuations of the in-
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put/output, and hence the efficiency score. None of the proposed methods in the current

literature incorporates all the information in the efficiency score distributions for ranking
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DMUs. To fill this gap, we introduce two ranking methods, a partial and a linear, for
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performance evaluation in SDEA using the reliability function of the efficiency scores.
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Our proposed partial ranking is based on the notion of stochastic ordering, while our
∗
Correspondence: Mostafa Davtalab-Olyaie, Department of Applied Mathematics, Faculty of Math-

ematical Sciences, University of Kashan, Kashan, 8731753153, I R Iran, (Tel:+983155913068,

m.davtalab-olyaie@kashanu.ac.ir).
†
Dept of Math & Stat, McGill Univ, Burnside Hall, Room 1224, 805 Sherbrooke Street West, Montreal,

Quebec, Canada, H3A 0B9 (Tel:+15143981461, masoud.asgharian-dastenei@mcgill.ca).

‡
Dept of Math & Ind Eng, École Poly de Montreal, Canada, (vahid.partovinia@polymtl.ca).

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linear ordering is a weighted average of the reliability function of the efficiency scores.

Special cases of our proposed linear ranking method include mean and median order-

ing in SDEA. Our proposed partial ordering provides a notion for stochastic dominance

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using which one can define a natural notion of admissibility as a minimal performance

requirement. We demonstrate how the proposed ranking methods can be implemented

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and illustrate the methods using the Grundfeld data, analyzed using both parametric

and non-parametric approaches.

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Keywords: Data Envelopment Analysis; Stochastic Frontier Analysis; Reliability Func-

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tion; Stochastic Ranking; Admissibility.

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Stochastic Ranking and Dominance in DEA

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Abstract

Data Envelopment Analysis (DEA) requires deterministic input/output data for effi-

U
ciency evaluation of a set of Decision Making Units (DMUs). When there are more
AN
than one set of input/output data for each DMU, however, such requirement is infeasi-
M
ble. Stochastic DEA (SDEA), where input/output data are assumed to be stochastic,

is a natural approach for such applications. Performance evaluation of DMUs in SDEA

D

naturally calls for ranking methods that can account for stochastic fluctuations of the in-
TE

put/output, and hence the efficiency score. None of the proposed methods in the current

literature incorporates all the information in the efficiency score distributions for ranking
EP

DMUs. To fill this gap, we introduce two ranking methods, a partial and a linear, for
C

performance evaluation in SDEA using the reliability function of the efficiency scores.
AC

Our proposed partial ranking is based on the notion of stochastic ordering, while our

linear ordering is a weighted average of the reliability function of the efficiency scores.

Special cases of our proposed linear ranking method include mean and median order-

ing in SDEA. Our proposed partial ordering provides a notion for stochastic dominance

using which one can define a natural notion of admissibility as a minimal performance

requirement. We demonstrate how the proposed ranking methods can be implemented

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and illustrate the methods using the Grundfeld data, analyzed using both parametric

and non-parametric approaches.

Keywords: Data Envelopment Analysis; Stochastic Frontier Analysis; Reliability Func-

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tion; Stochastic Ranking; Admissibility.

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1 Introduction

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Efficiency evaluation of decision making units (DMUs) is often a question of prime

interest in many areas of application ranging from banking, business and economy to

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health care. Efficiency analysis concerns the performance of each unit in transforming
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their inputs into quantities of outputs. The relative comparison in efficiency analysis
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is examined against the efficient production frontier. In fact, the efficiency is measured

based on the deviation of the position of a specific DMU from the efficient frontier. The
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are two approaches often used in estimating the production frontier, parametric and
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non-parametric. The parametric approach known as stochastic frontier analysis (SFA)

postulates a known functional form for the production frontier beforehand. The non-
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parametric known as data envelopment analysis (DEA) evaluates the relative efficiency
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of DMUs without any explicitly specification of the functional relationships between

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multiple inputs and outputs.

In many real applications the inputs and outputs of DMUs are subject to techno-

logical uncertainties. This can occur when the observed data are collected over several

time periods. Stochastic models where the inputs and/or outputs are considered to be

random variables is a reasonable approach to account for such uncertainties or fluctu-

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ations when analyzing such data. When inputs and/or outputs are random then so is

the DEA efficiency scores of DMUs. Thus, the DEA efficiency score of each DMU has a

distribution function.

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As discussed in the literature review, there are several approaches in DEA to rank

DMUs when data are known with certainty, such as the cross-efficiency evaluation, su-

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per efficiency methods, among others. When the inputs and/or outputs are random,

some probabilistic, chance constraint models, and statistical methods, such as summery

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statistics of the efficiency score distribution and bootstrapping method, have been pro-

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posed to account for uncertainties. However, none of these approaches incorporates all

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the information of the efficiency score distributions for ranking and ordering DMUs. To

fill this gap, we use the notions and tools from reliability and statistical decision theory
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and introduce ranking methods in stochastic DEA.
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Our starting point is the estimation of the DEA efficiency distributions of DMUs.
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Having estimated the efficiency distributions, we propose two ranking methods using

the estimated efficiency distributions. Our first ranking method is a partial ranking
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method using the notion of stochastic ordering that encompasses all the information of

the efficiency distributions. The stochastic ordering is based on a point-wise comparison

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of the reliability function, the complementary distribution function that is. This partial
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ranking leads to the introduction of a natural minimal requirement called admissibility,

see Definition 2. Using the notion of admissibility one can categorize DMUs into two

categories, namely admissible and inadmissible DMUs.

To provide a sufficient condition for admissibility, we first study structure of the

distribution of the DEA efficiency. As observed by Simar and Wilson (2000, 2007) and

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Kao and Liu (2009), the distribution of the DEA efficiency estimator has a mixture

structure with a point mass at 1, i.e., pδ1 + (1 − p)g where δ1 is the Dirac delta function

at point 1, g is a continuous density on (0, 1) and 0 < p < 1. We formalize this result

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in Theorem 2, showing that the DEA efficiency distribution does not have a continuous

distribution even if both the random input and output variables are continuous. Using

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the point mass decomposition of the DEA efficiency distribution (Theorem 2), we then

provide a linear ranking method and some conditions to check stochastic ranking and a

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sufficient condition for admissibility.

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We also propose a linear ordering method based on a weighted average of the reli-

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ability function of efficiency scores. Special cases of this ranking method include mean

and median ranking. This ranking method may also be viewed as an interactive ranking
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where one incorporates prior knowledge about possible performance of different DMUs
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or how much inefficiency can be tolerated. Such information may be available to a man-
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ager and can be formulated in terms of a weight function which can take the production

manager preference into account.

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For implementation of the proposed ranking methods we need to estimate the ef-

ficiency score distribution of each DMU. The estimation of the efficiency score distri-
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butions of DMUs comprises two steps; first using a performance evaluation method to
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generate a sample from efficiency score distribution of each DMU, and second an esti-

mation method to estimate the efficiency score distribution for each DMU. To this end,

one can use DEA, SFA, etc, for step 1, and empirical cumulative distribution function

or a model-based approach for step 2. We discuss both parametric and nonparametric

efficiency evaluation approaches to obtain a sample from the efficiency score distribu-

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tion of each DMU. We then use both empirical and model-based estimation methods to

estimate the efficiency score distribution of each DMU.

The rest of this article is organized as follows. Section 2 presents the related liter-

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ature. The notion of stochastic ordering and admissibility are presented in Section 3.

The proposed linear ranking method is also presented in this section. Implementation

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of the proposed ranking methods is discussed in Section 4. A simple sufficient condi-

tion for admissibility in terms of the point-mass magnitude is presented in this section.

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We illustrate our methods using Grundfeld data in Section 5 where we use the Hasse

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diagram and graphical tools to visualize the result of our stochastic ranking. The last

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section contains the conclusion and some closing remarks. Proofs of the theorems are in

Appendix I.
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2 Literature Review
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we will review some of the models proposed in the literature to handle the presence

of stochastic elements. As mentioned above, there are two main approaches for es-
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timating the production frontier to evaluate the efficiency of DMUs, parametric and
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non-parametric approaches. Most of the research related to the productivity evaluation

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in a stochastic environment falls into the realm of the parametric analysis. Aigner et al.

(1977) and Meeusen and van den Broeck (1977) proposed some models by measuring

one-sided error caused by general statistical noise known as stochastic frontier approach.

Battese and Coelli (1995) also proposed a stochastic frontier production function model

for panel data on firms, in which the non-negative technical inefficiency effects are as-

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sumed to be a function of firm-specific variables and time. The reader can refer to

Kumbhakar and Lovell (2000) for a review on theoretical and practical aspects of effi-

ciency analysis using the stochastic frontier approach.

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The nonparametric approach known as the Data Envelopment Analysis (DEA), in-

troduced by Charnes et al. (1978, 1979) and extended by Banker et al. (1984), offers

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a method widely used for estimating the efficiency of a set of multi-input multi-output

DMUs. Following the criticisms of DEA raised by Schmidt (1985) and echoed further

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by Greene (1993), for the lack of solid statistical foundation, two different perspectives

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based on the source of the randomness, inefficiency versus inefficiency and noise, were

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introduced in the literature to fill the gap. The former assumes that there is no noise in

the data generating process (DGP) and all possible realizations belong to the production
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possibility set (PPS). Therefore the distance from the frontier just indicates the ineffi-
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ciency term. The latter assumes that there is noise in the DGP, and hence the distance
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from the frontier has two components, inefficiency and noise.

Banker (1993) established the first building block of a solid statistical foundation for
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DEA by showing that the DEA estimator is essentially the maximum likelihood estimator

of the production function under certain conditions. Gijbels et al. (1999) provided the
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asymptotic distribution of DEA estimator in the case of the single input and output.
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Kneip et al. (1998) generalized this result to the multiple inputs and outputs case.

Simar and Wilson (1998) and Simar and Wilson (2000) suggested bootstrap techniques

for evaluating the sampling variability of the efficiency estimator. Kneip et al. (2008)

provided a full theory on the asymptotic properties of DEA estimator and a double-

smooth bootstrap technique. Kneip et al. (2011) presented a simplified and consistent

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version of the double-smooth bootstrap method developed by Kneip et al. (2008). Simar

and Wilson (2007) proposed a two-stage method for estimation and statistical inference

on the efficiency score using single and double bootstrap techniques; and Barros and

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Peypoch (2009) applied this method to evaluate European airlines. Hall and Simar

(2002) showed a fully nonparametric model with noise and inefficiency is not identifiable

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and proposed a method that allows for introduction of noise into the model. Simar (2007)

extended these ideas to multivariate setting. Having taken a different perspective, Gong

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and Sun (1995) proposed some approaches to measure the relative efficiency of DMUs via

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estimating the performance of one random DMU with respect to a set of deterministic

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DMUs. A thorough review of the subject can be found in Simar and Wilson (2015).

Another common approach to handle the uncertainty is via chance constrained mod-
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els where the random Production Possibility Set (PPS) is replaced by an average PPS
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where the average is in the sense of Vorob’ev (1984). There has been a surge of articles
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on chance constrained models over the past two decades, see for example Land et al.

(1993), Olesen and Petersen (1995), Cooper et al. (1998), and Bruni et al. (2009), among
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others. A recent review of this subject can be found in Cooper et al. (2011). The effi-

ciency measured with respect to the average PPS is a fixed value. As discussed by Kao
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and Liu (2009) the inherent random fluctuation of the efficiency score, caused by the
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random nature of the input and output variables, cannot be captured using the chance

constrained models.

Kao and Liu (2009) discussed how to obtain the DEA efficiency distributions of

each DMU via a simulation technique, and used the mean of these distributions to rank

the DMUs. Lamb and Tee (2012) derived confidence intervals for the DEA efficiency

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distributions and developed a nonparametric bootstrap technique to rank DMUs. These

ranking methods are all based on a summary of the DEA efficiency distributions.

As reviewed in Adler et al. (2002), Angulo-Meza and Lins (2002) and Aldamak and

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Zolfaghari (2017), there are different categories of ranking methods in deterministic DEA.

For instance, the cross-efficiency evaluation (see Sexton et al. (1986), Liang et al. (2008),

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Wang and Chin (2010) and Davtalab-Olyaie (2018)), supper efficiency (see Andersen

and Petersen (1993), Mehrabian et al. (1999), and Chen et al. (2013)), and statistical

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technique (see Friedman and Sinuany-Stern (1997), Sinuany-Stern and Friedman (1998),

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and Sinuany-Stern and Friedman (2016)), among others.

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3 Ranking using stochastic ordering
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We first recall some basic concepts in efficiency analysis of DMUs. Consider a set of n
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m s
DMUs, each using m inputs, x ∈ R+ , to produce s outputs, y ∈ R+ . The Production
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Possibility Set (PPS), denoted by Ψ, is the set of all feasible activities,

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Ψ = {z = (x, y) | the output y can be produced with the input x}.

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The frontier of Ψ, denoted by ∂Ψ, is called the production function. The set Ψ can be
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described by its x or y sections as follows,

m s
X(y) = {x ∈ R+ | (x, y) ∈ Ψ} Y (x) = {y ∈ R+ | (x, y) ∈ Ψ}. (1)

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The Farrell efficiency boundaries are

∂X(y) = {x | x ∈ X(y), θx ∈
/ X(y) ∀0 < θ < 1} (2)

∂Y (x) = {y | y ∈ Y (x), φy ∈
/ Y (x) ∀φ > 1}, (3)

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using which Farrell input and output efficiency measures, θj and φj can be defined for

DMUj , j = 1, . . . , n, as θj = inf{θ | θxj ∈ X(yj )} and φj = sup{φ | φyj ∈ Y (xj )}.

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3.1 Stochastic ordering

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When inputs or outputs of DMUs are random variables, the θj = θ(xj , yj ) will also be

a random variable. To distinguish between random variables and their observed values,
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we use capital letters for random variables, while retaining small letters for the observed

values. Suppose Θj = Θ(xj , yj ) is the efficiency of DMUj . Let FΘj (·) and SΘj (·) be
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respectively the cumulative distribution function (cdf) and the reliability function (the
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complementary cdf) of Θj . One may use different measures of central tendency, such
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as mean, median or quantiles of FΘj (·), for j = 1, . . . , n to rank DMUs. These ranking

methods may be called, mean, median and quantile ranking. While the ranking methods
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are all based on a summary of FΘj (·), borrowing ideas from reliability and decision theory,
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one can consider the so-called stochastic ordering using the whole distribution of Θj , i.e.,

FΘj (·), which encompasses all the information about Θj .

Definition 1. We say DMUj stochastically dominates, or equivalently is stochastically more

efficient than, DMUj 0 on ∆ ⊆ [0, 1], denoted by Θj ∆ Θj 0 , if Sθj (θ) ≥ Sθj 0 (θ), for all θ ∈ ∆,

and the inequality is strict at some point in ∆. In particular, if ∆ = [0, 1], we write Θj  Θj 0 ,

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and say DMUj 0 is inadmissible.

It is reasonable to prefer DMUj over DMUj 0 if Θj > Θj 0 is more likely to happen than

its reverse. The following calculation shows that stochastic dominance is a sufficient

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condition for this intuitive preference, i.e., P (Θj > Θj 0 ) > 1/2 if Θj  Θj 0 , Θj is

independent of Θj 0 and the variables are continuous.

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Z ∞ Z ∞ Z ∞

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{SΘj (θ) − SΘj0 (θ)}dFΘj (θ) = SΘj (θ)dFΘj (θ) − SΘj0 (θ)dFΘj (θ)
−∞ −∞ −∞

= 1/2 − P (Θj 0 > Θj ),

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which implies AN
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Z ∞
P (Θj > Θj 0 ) = 1/2 + {SΘj (θ) − SΘj0 (θ)}dFΘj (θ). (4)
−∞
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Now continuity of the reliability functions and stochastic dominance (Θj  Θj 0 ) imply
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that the second term on the right hand side of 4 is positive.

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Figure 1 illustrates the notion of stochastic ordering. It depicts the probability density

functions (pdf), f (θ), and the reliability functions, S(θ), of the efficiency of two DMUs.
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We notice that while the pdfs are overlapping (left panel), the reliability function of
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DMU1 , the solid curve, is always below the reliability function of DMU2 , the dashed

curve. The reliability function of DMU1 is dominated by the reliability function of

DMU2 . In other words, for any given efficiency level ξ, the efficiency of DMU2 has a

greater chance to be above ξ than the efficiency of DMU1 . That is, the performance

of DMU2 is always superior to that of DMU1 if superiority is measured by likeliness of

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2.5

1.0
2.0

0.8
1.5

0.6
)
)

S(
f(

1.0

0.4

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0.5

0.2
0.0

0.0

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0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0

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Figure 1: Stochastic dominance - density (left) and reliability (right) functions of efficiency scores.

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being above an efficiency threshold.

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Let the mean of the random variable Θj be denoted by E(Θj ) and its β-quantile by

Ẽβ (Θj ), where 0 < β < 1. Each of these quantities can be used for a linear (total)
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ordering of DMUs. For instance, mean ranking can be performed based on E(Θj ) and

β-quantile ranking based on Ẽβ (Θj ). As a special case using Ẽβ=0.5 (Θj ), one can order
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DMUs based on the median of their efficiency distributions. It follows from Definition 1
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that ranking using stochastic ordering implies mean, median and quantile ranking. The
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converse is not necessarily true.

Remark 1. A simple partial reverse connection between ranking based on quantiles and stochas-
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tic ordering immediately follows. If for all 0 < β < 1, Ẽβ (Θj ) > Ẽβ (Θ0j ), then Θj  Θj 0 . This
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observation can be useful when a sample from both Θj and Θj 0 is available.

The notion of inadmissibility was introduced in Definition 1. To further investigate

and distinguish inadmissible DMUs from the admissible ones in Ψ, we need the following

definition. Let Γ = {ΘZ | Z ∈ Ψ} where ΘZ is the efficiency variable of Z and F =

{SΘ | Θ ∈ Γ}.

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Definition 2. Let F be a family of reliability functions. An S ∈ F is called admissible with

respect to G ⊆ F, if there is no S∗ ∈ G such that S∗ (θ) ≥ S(θ) for all θ ∈ [0, 1], and the

inequality is strict at least for one value of θ.

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3.2 General linear ranking method

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Stochastic ordering provides a partial ordering of the DMUs based on their efficiency

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distributions. A linear (complete) ordering can be defined using a weighted average

of the reliability distribution of the efficiency score. This linear ranking method is a

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generalization of the mean ranking and can be appealing when, for example, possible

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preferences and tolerance of a manager is available. Such preference and tolerance can

be modelled in terms of relative weights on different possible levels of efficiency.

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Suppose πj is a probability measure which represents these relative weights on [0,1],
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modelled using information given by a manager for DMUj . Let Ij = Iπj (SΘj ) =
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R
θ
SΘj (θ)πj (dθ). Then Ij can be interpreted as an interactive efficiency score accord-

ing to πj for DMUj , j = 1, . . . , n. The Ij is a generalization of mean. In fact, if we

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consider πj (dθ) = dθ, for j = 1, 2, . . . , n, then Ij = E(Θj ), j = 1, 2, . . . , n. In the sequel,

we only consider the common weight function for all DMUs, i.e. we assume πj = π, for
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j = 1, 2, . . . , n.
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Definition 3. We say DMUj is interactively more efficient than DMUj 0 , if Iπ (SΘj ) ≥ Iπ (SΘj 0 ).

Although a linear (complete) ordering of DMUs can also be achieved using measures

of central tendencies such as mean and median of the efficiency score distribution, ranking

using Ij offers an adaptive approach to a manager’s preferences and tolerance to different

levels of inefficiencies. A manager can specify different weights over different regions in

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[0, 1] through the probability measure π. The following theorem establishes a close tie

between admissibility and ranking using Ij . The proof of the theorem is similar to that

of Theorem 1 of Asgharian and Noorbaloochi (1998).

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Theorem 1. SΘj ∈ G is admissible with respect to G, if there exists a π such that Iπ (SΘj ) >

Iπ (S) for all S ∈ G.

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4 Implementing ranking methods

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To implement the ideas developed in the previous section, one can measure efficiency

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using DEA based on information on a finite number, say n, of DMUs. Motivated by

the setting of our data example, we explain the implementation of the proposed ranking
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methods using panel data. In what follows, the (m + s)-vector zjt denotes the vector of

the inputs and outputs of DMUj at time t, for j = 1, 2, . . . , n and t = 1, 2, . . . , T .

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Under the standard assumption of inclusion of observations and return to scale, n

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observations construct the unique non-empty PPS at each time t, for t = 1, 2, . . . , T . We

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drop the subscript t when there is no danger of confusion.

 
 n
X n
X n
X 
ΨDEA = zjt | xi ≥ λj xijt , ∀i; yr ≤ λj yrjt , ∀r; L ≤ λj ≤ U ; λj ≥ 0, j = 1, . . . , n , (5)
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t
 
j=1 j=1 j=1
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where L(0 ≤ L ≤ 1) and U (U ≥ 0) are lower and upper bounds for the sum of λj .

Setting L = 0 and U = ∞, constant returns to scale assumption, gives ΨCCR (Charnes

et al., 1978); while setting L = U = 1, variable returns to scale assumption, gives ΨBCC

(Banker et al., 1984). The frontier of ΨDEA , ∂ΨDEA , provides an estimate of ∂Ψ, the

production function. Should we take ΨCCR , for instance, we can evaluate the relative

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efficiency by solving the CCR model

θo∗ = min θ (6)

n
X
s.t. λj xij ≤ θxio , i = 1, . . . , m

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j=1
Xn
λj yrj ≥ yro , r = 1, . . . , s

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j=1

λj ≥ 0, j = 1, . . . , n.

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If θo∗ = 1, then DMUo is CCR-efficient.

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n
Let θjt be the efficiency score of DMUj at time t using available information on n
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DMUs. The Empirical Cumulative Distribution Function (ECDF) of Θnj , i.e. the cdf of

n
θjt , t = 1, 2, . . . , T , is a natural estimate for FΘnj , the cdf of the efficiency score of DMUj
M
using information on n DMUs. We denote this estimate by FbT,Θnj . Under relatively mild
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conditions FbT,Θnj is a consistent estimator of FΘnj which, in turn, is an estimate of FΘj .

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n
The fundamental underlying assumption for the consistency is that θjt , t = 1, 2, . . . , T

are all realizations of the same random variable, Θnj .

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The above approach is a nonparametric approach. One can also take a parametric

approach by specifying a parametric form for the data generating process. Kao and Liu
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(2009) have taken such an approach. We try both the nonparametric and the parametric
AC

approach in our data analysis.

The following result shows that when there are finitely many DMUs, there is at least

one DMU whose efficiency score has a mixture structure with a point mass at 1. This

is true irrespective of the input and output variables being discrete or continuous. This

point has also been implicitly mentioned by Simar and Wilson (2007) and Kao and Liu

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(2009). The proof of the theorem can be found in Appendix I.

Theorem 2. Let Θnj be the efficiency score of DMUj , for j = 1, . . . , n. Then there is at least

one Θnj with a positive mass at 1.

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Let FΘnj be the cumulative distribution function of Θnj , which is an estimate of FΘj .

Using Theorem 2 we have the following decomposition,

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SΘnj (θ) = pj + (1 − pj )SΘ<nj (θ), (7)

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where pnj = P (Θnj = 1), and SΘnj (θ) = 1 − FΘnj (θ). Similarly we define SΘ<nj (θ) =

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1 − FΘ<nj (θ), where FΘ<nj is the cdf of the inefficiency component of the DEA efficiency

score distribution. In the other words, FΘ<nj is the cdf of Θnj when Θnj < 1.
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The point mass decomposition structure of DEA efficiency distribution can be used
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to introduce a further simple ranking method using the point mass at 1. DMUs can be
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ranked according to the point mass of their DEA efficiencies at 1, the greater the point

mass of a DMU at 1, the higher the ranking of the DMU. We call this ranking method
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p-ranking. The p-ranking method is perhaps the simplest method of ranking among

the methods suggested above. Direct verification of admissibility using Definition 2

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can be cumbersome. Using the mass point decomposition of the efficiency distribution,
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equation (7), the following result whose proof is given in Appendix I can be established.

√
Theorem 3. If pno > 3 − 6, then DMUo is admissible.

In real application the value of pn0 is estimated from the available data. Caution

should be taken when the estimated value is used to make conclusion about admissibility

of a DMU. This is, particularly, so when the sample size, T , is small. As a minimum

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requirement we suggest that the lower bound of the confidence interval for pn0 be clearly
√
above 3- 6 ≈ 0.55.

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5 Application of the method in the parametric and

nonparametric setting

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We illustrate the methodologies developed in the previous sections using the Grundfeld

data of Greene (2011)1 . The data is on 10 firms where each firm uses two inputs (x1 =

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market value of the firm at the end of the previous year (Fit ), and x2 = value of the stock

AN
of plant and equipment at the end of the previous year (Cit)) to produce one output

(y = gross investment (Iit)). These information were collected on yearly basis for each
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firm over a period of 20 years (1935–1954). We first apply our ranking methods on the
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results obtained from DEA estimator. We then use SFA model to estimate efficiency of
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each firm and apply our ranking methods on its results.

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5.1 Non-parametric approach: Analyzing data using DEA

5.1.1 Implementing the proposed ranking method using ECDF

C
AC

To analyze Grundfeld data, we first calculate the efficiency of each firm using CCR model

for 20 consecutive years. Figure 2 below shows the box-plot and the trend of efficiency

of each firm calculated for 20 consecutive years.

We take the nonparametric approach in estimating FΘnj for j = 1, 2, . . . , n and ap-

ply the proposed ordering methods to rank DMUs using FbT,Θnj . Figure 3 depicts the
1
The data is available online through
http://people.stern.nyu.edu/wgreene/Text/tables/Grunfeld.txt.

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1.0

DMU1

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DMU2
DMU3
0.8

DMU4
Relative Efficiency

DMU5
DMU6
0.6

DMU7

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DMU8
DMU9
DMU10
0.4

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0.2

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0.0

5 10 15 20 25
TIME
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Figure 2: Grundfeld data - Box-plot and efficiency pattern of the firms between 1935-1954.
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estimated reliability function, 1 − FbT,Θnj , for j = 1, 2, . . . , 10.

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The summary of our findings is documented in Table 1. As seen in Table 1, one

cannot easily rank firms based on their 20-year performance using a linear ordering
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method. For example, the median ordering according to observed data cannot distinguish
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between DMU2 and DMU7 , and p-ordering can not rank DMU3 , DMU4 , DMU6 , DMU9

and DMU10 . Besides, linear ordering methods do not use all the information in the

efficiency score distributions of DMUs, and hence cannot capture the whole picture.

For example, DMU1 has a higher ranking in mean ordering in comparison with DMU5 ,

but it cannot stochastically dominate DMU5 (see Column 5 of Table 1). Moreover, the

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DMU 1 DMU 2

1.0

1.0
0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
0.0

0.0

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0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

DMU 3 DMU 4

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1.0

1.0
0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4

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0.2

0.2
0.0

0.0
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.0 0.2 0.4 0.6 0.8
Efficiency levels Efficiency levels

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DMU 5 DMU 6
1.0

1.0

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0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
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0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8
Efficiency levels Efficiency levels
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DMU 7 DMU 8
1.0

1.0
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0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
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0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

DMU 9 DMU 10
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1.0

1.0
0.8

0.8
Reliability function

Reliability function
AC 0.6

0.6
0.4

0.4
0.2

0.2
0.0

0.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.0 0.1 0.2 0.3 0.4 0.5 0.6
Efficiency levels Efficiency levels

Figure 3: Grundfeld data - empirical estimates of the reliability functions of the CCR efficiency of 10 firms
over 20 years with 95% CI.

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DMU Median Mean p̂nj Stochastically Interactive efficiency Interactive efficiency

dominated units using π1 using π2
1 0.898 (2) 0.827 (3) 0.45 (3) {3, 4, 6, 8, 9, 10} 0.552 (3) 0.492 (3)
2 1.00 (1) 1.000 (1) 1.00 (1) {1, 3, 4, 5, 6, 7, 8, 9, 10} 1.00 (1) 0.978 (1)
3 0.250 (9) 0.254 (10) 0.00 (6) {} 0.00(10) 0.00 (8)
4 0.600 (4) 0.641 (5) 0.00 (6) {3, 9, 10} 0.152 (6) 0.079 (6)
5 0.824 (3) 0.815 (4) 0.35 (4) {3, 4, 6, 8, 9, 10} 0.494 (4) 0.410 (4)
6 0.588 (5) 0.623 (6) 0.00 (6) {3, 9, 10} 0.106 (7) 0.027 (7)

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7 1.00 (1) 0.926 (2) 0.70 (2) {3, 4, 6, 8, 9, 10} 0.815 (2) 0.763 (2)
8 0.436 (7) 0.494 (7) 0.15 (5) {3, 10} 0.159(5) 0.147 (5)
9 0.454 (6) 0.486 (8) 0.00 (6) {3, 10} 0.024 (8) 0.00 (8)
10 0.309 (8) 0.327 (9) 0.00 (6) {} 0.009 (9) 0.00 (8)

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Table 1: Grundfeld data - partial and linear ranking using different empirical summaries of efficiencies obtained
from DEA estimator.

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rankings of DMUs is sensitive to which linear ordering methods have been used in our

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analysis, as seen in Table 1, there are different rankings of DMUs according to different

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linear ranking methods. For instance, DMU8 is ranked 5th using π1 in the weighted

average of its reliability distribution of the efficiency score, Column 6, while it is ranked
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8th using the same weight in the weighted average method (mean ordering), Column

3. In contrast, using stochastic ordering we observe that DMU2 dominates all the other
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DMUs, and hence has the highest ordering using all the ranking methods.This is so since
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stochastic ordering use all the information of the estimated reliability functions. This
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means that DMU2 is the only admissible DMU. The inadmissibility of DMU7 calls for a

careful attention since the estimated value for pn7 is 0.7. Using Theorem 3, pnj ≥ 0.55 is
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a sufficient condition for admissibility. We emphasize that 0.7 is only an estimate of pn7
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based on 20 observations, and not the actual value of pn7 . A closer inspection of Figure 3

actually shows that the lower bound of the confidence interval for pn7 is 0.525 which is

below the 0.55 cut-off point.

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5.1.2 Model-based analysis

In a model-based approach we typically assume that the form of the data generating

process is know up to finitely many unknown parameters. The specific form chosen for

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the data analysis may be motivated by prior information about the inputs/outputs data

or using methods like maximum entropy. Should one take this latter approach, one may

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assume a uniform distribution for each input/output of each DMU over their observed

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range. To allow some flexibility, one may use beta distribution and use some calibration

by estimating the unknown parameters for each input/output of each DMU using the

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available data. We refer the reader to Law and Kelton (2000) and Kao and Liu (2009)
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for further discussion on the choice of a parametric model.

To present a model-based analysis of Grundfeld data we assume that the inputs

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and outputs of the DMUs are distributed according to beta distribution with different
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parameter values. The distribution parameters of every input/output of every DMU are
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estimated using the input/output information collected for every DMU over the period

1935-1954.
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Given that there are two inputs and one output for each DMU and there is a to-

tal of ten DMU, we have 30 beta distributions. The α1 and α2 parameters of these
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beta distributions are estimated using the observed data over 20 years. Note that the
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standard beta distribution has a domain of [0, 1]. We use a linear transformation for

each input/output of each DMU to produce a beta distribution whose support is the

range covered by the observed minimum and maximum of that input/output. For a

generalized beta distribution defined on the interval [a, b], one can estimate α1 and α2

for each of the 30 distributions using α1 = λ(µ − a)/b − a, α2 = λ(b − µ)/b − a, where

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λ = ((µ − a)(b − µ)/σ 2 ) − 1 where µ and σ 2 are the mean and variance estimated for

each input/output from the observations over 20 years.

Having estimated the parameters of the beta distribution for each input/output, we

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generate B = 2000 data sets by generating B observations from the 30 beta distributions

as described above. We then generate 2000 efficiency score for each DMU by applying

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CCR model for each data set.

The generated efficiency samples can then be used to estimate pnj and the reliability

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function SΘ<nj (.) for DMUj , for j = 1, 2, . . . , 10. The reliability function of the efficiency

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score of each DMU along with their 95% confidence bounds are depicted in Figure 4.

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The codes are implemented in R package (R Development Core Team, 2005) using the

package Benchmarking (Bogetoft and Otto, 2010). We have summarized our findings
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using this model-based approach in Table 2. Columns 2–4 in Table 2 provide the results
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of ranking methods which are based on summery of efficiency distributions, median,

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mean and p-ordering, respectively.

DMU Median Mean p̂j Stochastically Interactive efficiency Interactive efficiency

dominated units using π1 using π2
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1 0.855 (3) 0.729 (4) 0.444 (3) {3, 4, 6, 8, 9, 10} 0.544 (3) 0.430 (3)
2 1.000 (1) 0.878 (1) 0.603 (1) {1, 3, 4, 6, 8, 9, 10} 0.758 (1) 0.603 (1)
3 0.220 (9) 0.270 (10) 0.010 (10) {} 0.029(10) 0.017 (10)
4 0.662 (5) 0.661 (5) 0.326 (5) {3, 6, 8, 9, 10} 0.429 (5) 0.331 (5)
{3, 4, 6, 8, 9, 10}
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5 0.804 (4) 0.764 (3) 0.341 (4) 0.510 (4) 0.379 (4)
6 0.559 (6) 0.598 (6) 0.276 (6) {3, 8, 10} 0.362 (6) 0.278 (6)
7 0.972 (2) 0.824 (2) 0.482 (2) {1, 3, 4, 6, 8, 9, 10} 0.638 (2) 0.496 (2)
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8 0.349 (8) 0.447 (7) 0.145 (7) {3, 10} 0.198 (7) 0.148 (7)
9 0.386 (7) 0.430 (8) 0.022 (9) {3} 0.076 (8) 0.040 (8)
10 0.217 (10) 0.283 (9) 0.028 (8) {} 0.053 (9) 0.035 (9)

Table 2: Grundfeld data - partial and linear ranking using beta distribution.

Clearly those DMUs whose efficiency scores have a greater chance to be near 1 are

more preferred. Hence, the DMUs whose efficiency score distribution have heavier right

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DMU 1 DMU 2

1.0

1.0
0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
0.0

0.0

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0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

DMU 3 DMU 4

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1.0

1.0
0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4

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0.2

0.2
0.0

0.0
0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

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DMU 5 DMU 6
1.0

1.0

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0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
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0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels
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DMU 7 DMU 8
1.0

1.0
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0.8

0.8
Reliability function

Reliability function
0.6

0.6
0.4

0.4
0.2

0.2
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0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

DMU 9 DMU 10
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1.0

1.0
0.8

0.8
Reliability function

Reliability function
AC 0.6

0.6
0.4

0.4
0.2

0.2
0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0
Efficiency levels Efficiency levels

Figure 4: Grundfeld data - model-based estimates of the reliability functions of the CCR efficiencies distribu-
tions with 95% CI.

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tail are more likely to be efficient, and therefore they are more preferred. As seen

in Figure 4, the reliability functions of the efficiencies of DMU2 and DMU7 have the

top two heaviest right tails among the ten DMUs while DMU3 and DMU10 have the

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lightest right tails. Thus DMU2 and DMU7 are clearly have the best performance while

DMU3 and DMU10 have the worst. The linear ordering methods reported in Table 2

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indicates that DMU2 has the best while DMU3 has the worst performance among the

ten DMUs. It should be noted that the results of stochastic ordering, column 5 of

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Table 2, is consistent with Figure 4. For example, as seen in Figure 4 the reliability

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functions of the efficiencies of DMU2 and DMU7 are superior to that of other DMUs

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except DMU5 . The results of median and mean ordering are almost the same, but there

are some differences. For example, DMU5 has a higher ranking than DMU1 using mean
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ordering, while using median ordering DMU1 is ranked higher than DMU5 . As seen
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in Table 2, each DMU has a superior performance compared to all of its stochastically
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dominated DMUs in all ranking methods. For example DMU5 stochastically dominates

the set {DM U3 , DM U4 , DM U6 , DM U8 , DM U9 , DM U10 }, and it has a better rank using

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all ranking methods compared with all DMUs in that set. As discussed in the previous

section, linear ordering methods do not use all the information in the efficiency score
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distributions of DMUs, and hence cannot capture the whole picture. For example, there
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are some DMUs which are unordered by DMU5 , {DM U1 , DM U2 , DM U7 }, such that

these DMUs may have a better rank using some ranking methods than DMU5 . As seen

in Table 2, DMU2 and DMU7 have a better ranks in all ranking method than DMU5 ,

while DMU5 is better than DMU1 just in mean ordering. This indicates that although

DMU5 is an admissible DMU, it is ranked below an inadmissible unit, DMU1 , using

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median and p-ordering methods. As seen in Table 2, DMU1 and DMU5 are unordered,

but p-ordering assigns a better rank for DMU1 than DMU5 . It means that DMU1 is

more likely to be efficient than DMU5 .

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5.1.3 Interactive ordering

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Given that stochastic ordering provides a partial ordering of the DMUs, several DMUs

naturally remain unordered. The preference of a manager can be used to achieve a linear

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(complete) ordering of DMUs by averaging the reliability functions of the efficiency scores

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with respect to the weights (preferences and tolerance) of the manager. For instance,

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suppose that a manager accepts DMUs whose efficiencies are above 0.8 (high range

efficiency) majority of time (60%), and he/she can tolerate low range of efficiency (below
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0.5) 10% of the time; and the rest of time the manager can tolerate a mid range efficiency

(between 0.5 and 0.8).

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The task is then to devise a distribution that fulfills these preferences, i.e. putting
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60% of its mass between [0.8, 1], 30% between [0.5, 0.8] and the rest between [0, 0.5]. It
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is clear that there are infinitely many distributions that can fulfill such constraints. A

simple one is perhaps

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π1 (θ) = 0.1U[0,0.5] + 0.3U[0.5,0.8] + 0.6U[0.8,1] ,

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where U[a,b] is the Uniform distribution over [a, b]. In other words,


1




 5
if θ ∈ [0, 0.5)


π1 (θ) = 1 if θ ∈ [0.5, 0.8) (8)

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




 3 if θ ∈ [0.8, 1].


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The probability density function (pdf) π1 is non-informative on each subregion. One

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may want to introduce a distribution that is increasing over each sub region, i.e. giving

more priority on the right end point of each subregion, while fulfilling the constraints.

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To this end, we determine ai , bi for i = 1, 2, 3 such that the following distribution fulfills

the conditions. 

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


 a1 θ + b1 if θ ∈ [0, 0.5)
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

π2 (θ) = a2 θ + b2 if θ ∈ [0.5, 0.8) (9)





 a3 θ + b3 if θ ∈ [0.8, 1].
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
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Adding continuity at the boundaries and assuming π(0) = 0 we find

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a1 = 0.8, b1 = 0, a2 = 4, b2 = −1.6, a3 = 14, b3 = −9.6.

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Using π2 (θ) we can calculate the plug-in estimate of the interactive efficiency index
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Iπ (SΘnj ) by Iπ (S
dΘn
j
), for j = 1, 2, . . . , n where

Z 1
Iπ\
(SΘnj ) = Iπ (S
dΘn
j
)= S
d Θn
j
(θ)π(θ)dθ.
0

According to the two last columns of Table 2, interactive ordering using both (8) and

(9) suggest that DMU2 and DMU3 have the best and worst performance, respectively.

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It should be noted that the ranking obtained using (8) and (9) are the same, i.e. some

robustness to changing the weight function from π1 to π2 . As seen in Table 2, DMU9 has

a lower ranking using p-ordering than DMU10 while its interactive ranking using both

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weight functions, π1 and π2 , is higher than that of DMU10 .

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5.1.4 Comparison between the two analyses

Here we present some comparison between the two approaches taken for the analysis of

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the data.

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• The median ordering using the empirical distribution cannot distinguish between DMU2
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and DMU7 , while the efficiency of DMU2 has a greater median in the model-based analysis.
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• Since po = 0 for DMU3 , DMU4 , DMU6 , DMU9 and DMU10 using the empirical approach,

the first approach cannot provide a p-ranking for these DMUs. The second approach
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provides a p-rank for all DMUs. It is worth noting that DMU8 has a lower p-rank in com-
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parison with DMU4 and DMU6 in the second approach. This is expected from Figure 2.

In fact, even though DMU4 and DMU6 are not efficient over 20 years, but their trend of
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efficiencies are better than that of DMU8 over these 20 years.

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• There are some differences between interactive orderings according to these two ap-
AC

proaches. In both interactive ordering using π1 and π2 , the rank of DMU8 is increased to

5, and the ranks of DMU4 and DMU6 are fallen by 1 in the second approach. Moreover,

the empirical approach cannot produce distinctive ranking of DMU3 , DMU9 and DMU10 .

• The following Hasse diagrams (Rutherford (1965)), based on the results reported in Table

1 and 2, summarize the stochastic dominance using the two approaches:

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Figure 5: Grundfeld data-Hasse diagrams for the empirical (Left) and model-based (right) approaches.

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The Hasse diagrams indicate some differences. As seen in Figure 5, DMU4 is stochasti-

cally more efficient than the set

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{DM U3 , DM U6 , DM U8 , DM U9 , DM U10 } using the second approach while it cannot stochas-

tically dominate DMU6 and DMU8 using the empirical approach. DMU6 stochastically
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dominates DMU9 using the first approach while using the second approach it stochastically
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dominates DMU8 instead of DMU9 . In the model-based analysis, DMU7 stochastically

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dominates DMU1 . DMU10 is stochastically ordered by DMU9 using the first approach,

while they are unordered using the second approach. The main difference between order-
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ing using these two approaches is that DMU5 and DMU7 are stochastically ordered by
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DMU2 using the empirical approach, while they are unordered using the second approach.

In addition to DMU2 , DMU5 and DMU7 are also admissible units using the model-based

approach.

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5.2 Parametric approach: Analyzing data using SFA

Here, we use the stochastic frontier function approach, proposed by Battese and Coelli

(1992), to evaluate the efficiency of each firm in the Grundfeld data. As mentioned in the

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beginning of this section, each firm use two inputs, Fit and Cit, to produce one output,

Lit. We use the following stochastic frontier function model,

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ln(litjt ) = β0 + β1 ln(F it) + β2 ln(Cit) + Vjt − Ujt (10)

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where the subscripts j and t refer to jth firm and tth observation, respectively. The Vjt s

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are statistical noise and assumed to be independent and identically distributed N (0, σV2 ).

We also have Ujt = {exp[−η(t − Tj )]}Uj , t = 1, . . . , Tj , j = 1, . . . , n, where Tj indicates

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the set of time periods among the T periods involved for which observations for the

jth firm are obtained, and the Ui s are non-negative random variables corresponding to
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the inefficiency terms which are assumed to be independent and identically distributed
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according to half normal distribution. This model is such that the non-negative firm
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effects, Uit , decreases, remains constant or increases as t increases, if η > 0, η = 0 or

η < 0, respectively. As mentioned by Battese and Coelli (1992), η > 0 is likely to be

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appropriate when firms tend to improve their level of technical efficiency over time. We
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note that in model (10) the time dimension of the inefficiency term will be allowed to

change over time, and so this model is called time variant. In contrast, if in model (10)

we have Uit = Ui , i.e., η = 0, the efficiency term is time-invariant.

To apply our proposed ranking methods using the SFA model and theory developed

by Battese and Coelli (1992), we make our panel data unbalanced by randomly choosing

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different number of years for different DMUs2 . The following table shows the years

considered randomly for different DMUs, where ”\” stands for set minus.

DMU The number of considered year The years randomly considered for each DMU
1 10 {1937,1938,1940,1942,1944,1945,1947,1948,1950,1953}
2 13 {1935–1954}\{1937,1939,1941,1942,1944,1948,1951}

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3 17 {1935–1954}\{1943,1951,1952}
4 16 {1935–1954}\{1938,1946,1949,1951}
5 14 {1935–1954}\{1943,1944,1949,1950,1952,1954}
6 20 {1935–1954}

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7 15 {1935–1954}\{1936,1947,1949,1951,1952}
8 11 {1935–1954}\{1939,1940,1943,1944,1945,1946,1947,1948,1951}
9 12 {1935–1954}\{1940,1943,1945,1946,1948,1951,1952,1953}

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10 18 {1935–1954}\{1936,1942}

Table 3: Unbalanced Grundfeld data.

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When we take the above time-variant SFA model on the unbalanced Grundfeld data,
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we will have a sample from efficiency score distribution of each DMU. Figure 6 below

shows the box-plot and the trend of efficiency of each firm.

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We take the empirical approach in estimating the reliability function of the efficiency
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distribution of each firm, and apply the proposed ordering methods to rank DMUs.
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Figure 7 depicts the estimated reliability functions of different firms. The codes are im-

plemented in R package (R Development Core Team, 2005) using the package frontier.
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Table 4 provides the partial and linear ranking using different empirical summaries of
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efficiencies obtained from SFA estimator. The efficiency scores of DMUs obtained from
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time-invariant SFA approach are reported in Column 2. Columns 3–5 provide median,

mean and stochastic ordering of DMUs using time-variant SFA approach, respectively.

As seen in Columns 3 and 4, we have the same rankings of DMUs using Time-

variant approach. In contrast, time-invariant approach provides very different rankings

2
The SFA model proposed by Battese and Coelli (1992) postulates an identical efficiency score distribution
for all DMUs when data is balanced

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1.0
0.8
Efficiency (time-variant SFA method)

0.6
0.4

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0.2

1 2 3 4 5 6 7 8 9 10

DMU

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1.0

DMU1
DMU2
DMU3
DMU4
DMU5

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0.8

DMU6
DMU7
Efficiency (time-variant SFA method)

DMU8
DMU9
DMU10
0.6
0.4

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0.2

AN
0.0

5 10 15 20 25

TIME
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Figure 6: Unbalanced Grundfeld data - Box-plot and efficiency pattern of the firms with SFA estimator.
DMU Time-invariant efficiencies Time-variant efficiencies
Median Mean Stochastically dominated units
D

1 0.6985 (2) 0.6294 (5) 0.6270 (5) {3, 8, 9, 10}

2 0.9346 (1) 0.9348 (2) 0.9325 (2) {1, 3, 4, 6, 8, 9, 10}
TE

3 0.2162 (9) 0.2272 (10) 0.2271 (10) {}

4 0.5510 (5) 0.6139 (6) 0.6171 (6) {3, 8, 9, 10}
5 0.5896 (4) 0.9267 (3) 0.9284 (3) {1, 3, 4, 6, 8, 9, 10}
6 0.5034 (6) 0.6508 (4) 0.6486 (4) {1, 3, 4, 8, 9, 10}
7 0.6435 (3) 0.9552 (1) 0.9556 (1) {1, 2, 3, 4, 5, 6, 8, 9, 10}
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8 0.3707 (7) 0.4080 (8) 0.4310 (8) {3, 10}

9 0.3147 (8) 0.4539 (7) 0.4648 (7) {3, 10}
10 0.1953 (10) 0.2791 (9) 0.2765 (9) {3}
C

Table 4: Unbalanced Grundfeld data - partial and linear ranking using different empirical summaries of
efficiencies obtained from SFA estimator.
AC

of DMUs in comparison with the mean and median orderings in time-variant technique.

For example, DMU2 has the best ranking using time-invariant approach, while the best

DMU is DMU7 using time-variant.

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DMU 1 DMU 2

1.0

1.0
0.8

0.8
Efficiency (time-variant SFA method)

Efficiency (time-variant SFA method)

0.6

0.6
0.4

0.4
0.2

0.2

PT
0.0

0.0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.0 0.2 0.4 0.6 0.8

Efficiency levels Efficiency levels

DMU 3 DMU 4
1.0

1.0

RI
0.8

0.8
Efficiency (time-variant SFA method)

Efficiency (time-variant SFA method)

0.6

0.6
0.4

0.4

SC
0.2

0.2
0.0

0.0
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Efficiency levels Efficiency levels

U
DMU 5 DMU 6
1.0

1.0
AN
0.8

0.8
Efficiency (time-variant SFA method)

Efficiency (time-variant SFA method)

0.6

0.6
0.4

0.4
0.2

0.2
M
0.0

0.0

0.0 0.2 0.4 0.6 0.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Efficiency levels Efficiency levels

DMU 7 DMU 8
D
1.0

1.0
0.8

0.8
Efficiency (time-variant SFA method)

Efficiency (time-variant SFA method)

TE
0.6

0.6
0.4

0.4
0.2

0.2
EP
0.0

0.0

0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.1 0.2 0.3 0.4 0.5

Efficiency levels Efficiency levels

DMU 9 DMU 10
1.0

1.0
C
0.8

0.8
Efficiency (time-variant SFA method)

Efficiency (time-variant SFA method)

0.6

0.6
AC
0.4

0.4
0.2

0.2
0.0

0.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Efficiency levels Efficiency levels

Figure 7: Unbalanced Grundfeld data - empirical estimates of the reliability functions of the efficiency distri-
butions using time-variant SFA approach with 95% CI.

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5.2.1 Comparison between DEA and SFA analyses

Here we present some comparisons between the results of our proposed ranking meth-

ods using the empirical estimated SFA and DEA reliability functions of efficiency score

PT
distributions of DMUs.

• DMU7 is ranked 1st by mean and median orderings using empirical SFA efficiencies, while

RI
DMU2 is ranked 1st by these ordering methods using DEA. We only have two DMUs,

SC
{DM U3 , DM U10 } ({DM U5 , DM U7 }), with the same ranks in mean ordering (median

ordering) using both approaches.

U
AN
• The following Hasse diagrams, based on the results reported in Tables 1 and 4, summarize

the stochastic dominance using the two approaches. Clearly DMU2 and DMU7 show
M
D
TE
C EP
AC

Figure 8: Grundfeld data-Hasse diagram for the empirical DEA (left) and empirical SFA (right) analyses.

better performances compared to the other DMUs using different analyses. Yet there are

some differences. As seen in Figure 8, DMU2 stochastically dominates all other DMUs

using the empirical estimation of the DEA efficiencies, while it is dominated by DMU7

using the empirical estimation of the SFA efficiencies.

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The set of DMUs dominated using DEA approach is a subset of the set of DMUs domi-

nated using SFA approach for all, but DMU7 . For example, DMU6 is stochastically more

efficient than the set

PT
{DM U1 , DM U3 , DM U4 , DM U8 , DM U9 , DM U10 } using the SFA analysis while it cannot

stochastically dominate DMU1 , DMU4 and DMU8 using the DEA analysis.

RI
DMU3 and DMU10 are unordered using DEA analysis, while DMU10 dominates DMU3 in

SC
the SFA analysis. Therefore, DMU3 has the worst performance among all DMUs in the

SFA analysis.

U
6 Conclusions
AN
M
The proposed methods in the current literature on stochastic DEA do not use all the in-

formation contained in the efficiency score distributions for ranking and ordering DMUs.
D

In this manuscript, we have addressed this gap by introducing two ranking methods,
TE

partial and general linear ordering, borrowing ideas from reliability and statistical de-
EP

cision theory. The partial ordering paved the way further to the introduction of the

admissibility concept, a natural minimal requirement expected from a DMU. We have

C

also proposed a linear ordering method based on a weighted average of the reliability
AC

function of efficiency scores. Special cases of this ranking method include mean and

median ranking. This ranking method may also be viewed as an interactive ranking

where one incorporates prior knowledge about possible performance of different DMUs,

when such knowledge is available, or how much inefficiency can be tolerated.

The implementation of the proposed ranking methods comprises two steps; first using

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 ACCEPTED MANUSCRIPT

a performance evaluation method, and second an estimation method to estimate the

efficiency score distribution for each DMU. To this end, one can use DEA, SFA, etc,

for step 1, and empirical cumulative distribution function or a model-based approach

PT
for step 2. For DEA approach in step 1 we used CCR model in this manuscript. One

can however used BCC model (Banker et al. (1984)). All theorems presented in this

RI
manuscript hold true if we replace CCR model by BCC model in step 1. We have

illustrated our proposed ranking methods using both parametric and nonparametric

SC
efficiency evaluation approaches, and empirical and model-based estimation methods.

U
The analysis of Grundfeld data using different methods indicates some similarities

AN
and dissimilarities. The dissimilarities posed a question as to which analyses should

be given more credibility. To this end, we have depicted the scatter plot of data in the
M
following figure. The scatter plot indicates a linear relationship between the logarithm of
D
TE
8

EP 6
4
Inv

Fit

9
2

8
C

7
0

4
AC
-2

-2 0 2 4 6 8

Cit

Figure 9: Scatter plot of the unbalanced Grundfeld data.

the output and the logarithm of the inputs, hence providing strong evidence in support

of SFA as the proper method of efficiency evaluation for Grundfeld data. It should be

noted that the low dimensionality of inputs and outputs of Grundfeld data facilitated

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 ACCEPTED MANUSCRIPT

depiction of the data which gave us decisive evidence for choosing SFA as the more

appropriate approach for analyzing Grundfeld data. When the dimension of the outputs

and/or the inputs is above three, the data visualization will not be as easy. The difficulty

PT
exacerbates as the dimension of the outputs and/or inputs grow. In such situations, it

is more reasonable to use a robust approach for efficiency evaluation, such as DEA, than

RI
a parametric approach, such as SFA. This is so since model validation is hard if it is not

impossible.

SC
Another type of uncertainty, not discussed in this manuscript, which has been consid-

U
ered in the literature, is the so-called market uncertainty where the prices of the inputs

AN
or the outputs of DMUs are subject to uncertainties (see for example Sengupta (1999,

2005)). The extension of the proposed methods to accommodate market uncertainty

M
requires further work.
D

Acknowledgement: The authors would like to express their sincere gratitude to the
TE

Editors, the AE handling this article and two anonymous referees whose comments and

suggestions considerably improved this manuscript. This research was partly supported
EP

by the Natural Sciences and Engineering Research Council (NSERC) of Canada [NSERC-

RGPIN-2018-05618].
C
AC

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Appendix I

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Proof of theorems

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Proof of Theorem 2: We first note that Θn is a random variable defined on the probability

space (Ω, =, P ), where = is a σ-algebra of the subsets of Ω and P is the probability

U
measure on =. We further note that for any ω ∈ Ω we have a ΨCCR . Let Ai = {ω ∈
AN
Ω : Θni (ω) = 1} for i = 1, . . . , n. Since in any ΨCCR there is at least one efficient DMU,
n
M
S
we have Ω = Ai . Now suppose that there is no mass point at 1 for any DMU, i.e.,
i=1

pi = P (ω : Θni (ω) = 1) = P (Ai ) = 0 for i = 1, . . . , n. Then using Boole’s inequality,

D

n
S n
P n
S
P( Ai ) ≤ P (Ai ) = 0. On the other hand, P ( Ai ) = P (Ω) = 1. This is a
i=1 i=1 i=1
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contradiction. 
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To prove Theorem 3, we need to establish the following lemma first.

 
Lemma 1. If DMUo is inadmissible, then there exists λ̃ = λ̃1 , ..., λ̃n ≥ 0 such that P (Θnλ̃ ≥
C

2
Θno ) ≥ 2po − po2+1 , where Θnλ̃ indicates the efficiency of the virtual stochastic DMU ( nj=1 λ̃j Xj , nj=1 λ̃j Yj ).
P P
AC

 
Proof. Since DMUo is inadmissible, then there exists λ̃ = λ̃1 , ..., λ̃n ≥ 0 such that

SΘn (θ) ≥ SΘn (θ), for all θ ∈ [0, 1], (11)

λ̃

where SΘn (·) is the survival function of the efficiency of the virtual stochastic DMU
λ̃

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Pn Pn
that uses the input j=1 λ̃j Xj to produce the output j=1 λ̃j Yj . For any λ ≥ 0 define

Ωλ = {ω ∈ Ω | Θnλ (ω) > Θno (ω)}. We have

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P (Ωλ̃ ) = P (Θnλ̃ ≥ Θno )

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= P (Θnλ̃ ≥ Θno | Θno = 1)P (Θno = 1) + P (Θnλ̃ ≥ Θno | Θno < 1)P (Θno < 1)

= P (Θnλ̃ ≥ Θno | Θno = 1)po + P (Θnλ̃ ≥ Θno | Θno < 1)(1 − po ),

U SC
where

P (Θnλ̃ ≥ Θno | Θno < 1) =

Z 1
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P (Θnλ̃ ≥ Θno | Θno = θ, Θno < 1)dF (θ | Θno < 1)
Z0 1
M
(1 − po )
= P (Θnλ̃ ≥ Θno | Θno = θ, Θno < 1) dF <n (θ)
0 P (Θno < 1) Θo
Z 1
P (Θnλ̃ ≥ Θno | Θno = θ, Θno < 1)dFΘ<no (θ).
D

=
0
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S S
We note that DMUo is not on the frontier for any ω ∈ Ωλ . Thus given ω ∈ Ωλ , the
λ λ
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efficiency of DMUo cannot affect the efficiency of other DMUs. Thus Θnλ̃ is independent

of Θno given ω ∈
S
λ Ωλ . We therefore have
C

R1 R1
P (Θnλ̃ ≥ Θno | Θno < 1) = P (Θnλ̃ ≥ θ)dFΘ<no (θ) = SΘn (θ)dFΘ<no (θ).
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0 0 λ̃

Using (11),

R1
P (Θnλ̃ ≥ Θno | Θno < 1) ≥ 0
SΘno (θ)dFΘ<no (θ).

On the other hand, we know

SΘno (θ) = po + (1 − po )SΘ<n0 (θ), ∀θ ∈ [0, 1]; and hence

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R1 R1 (1−po ) 1+po
0
SΘno (θ)dFΘ<no (θ) = po + (1 − po ) 0
SΘ<no (θ)dFΘ<no (θ) = po + 2
= 2
. Then

(1 − p2o )
P (Ωλ̃ ) ≥ P (Θnλ̃ ≥ Θno | Θno = 1)P (Θno = 1) +
2
(1 − p2o )

PT
≥ P (Θnλ̃ = 1, Θno = 1) +
2
(1 − p2o )
= pλ̃ + po − P (Θnλ̃ = 1 or Θno = 1) +

RI
2
2
(1 − po )
≥ 2po − P (Θnλ̃ = 1 or Θno = 1) +
2

SC
2
p +1
≥ 2po − o .
2

U
Proof of Theorem 3: Suppose DMUo is inadmissible, then using Lemma 1, there
  AN 2
exists λ̃ = λ̃1 , ..., λ̃n such that P (Ωλ̃ ) = P (Θnλ̃ ≥ Θno ) ≥ 2po − po2+1 .
M
On the other hand, {ω ∈ Ω | Θno (ω) = 1} = Ω −
S
λ Ωλ . Thus
D

[
po = P (Θno = 1) = 1 − P ( Ωλ )
TE

≤ 1 − P (Ωλ̃ )
p2o + 1 p2 + 3
 
≤ 1 − 2po − = −2po + o .
EP

2 2

p2o +3
C

Hence, if DMUo is inadmissible, then −3po + 2

≥ 0. This inequality is fulfilled if
√
AC

po ∈ [0, 3 − 6]. This is a contradiction. 

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