WARWICK BUSINESS SCHOOL

WARWICK B USINESS SCHOOL

NO. 352 WEIGHT RESTRICTIONS AND RADICAL MEASURES OF EFFICIENCY
BY

Victor Podinovski OCTOBER 2002

RESEARCH PAPERS

at the cutting edge of theory and practice

Weight Restrictions and Radial Measures of Efficiency

Victor V. Podinovski Warwick Business School, University of Warwick, Coventry, CV 4 7AL, UK __________________________________________________________________ In data envelopment analysis (DEA), the incorporation of additional weight restrictions is widely used in order to improve the discrimination of the models. Weight restrictions are most commonly based upon the judgements about the importance of individual inputs and outputs, or reflect cost or price considerations. It is well-known that such weight restrictions generally invalidate the radial nature of efficiency and thus cause confusion over the interpretation of the resulting efficiency score. In this paper we prove that the only way to preserve the radial nature of efficiency in DEA models with weight restrictions is to make these consistent with the feasible production trade-offs between the inputs and outputs. The theoretical and practical implications of this result are explored. (Data Envelopment Analysis; Weight Restrictions; Trade-offs)

1. Introduction Weight restrictions of different types are often used in data envelopment analysis (DEA). By specifying, in relative or absolute terms, the lower and/or upper bounds for the weights associated with certain inputs and outputs, the DEA analyst can make the model more realistic (however subjective this notion is) and, to a certain extent, improve the discrimination of the model. The latter is especially important when the number of decision making units (DMUs) is relatively low in comparison to the number of inputs and outputs (Allen et al 1997, Thanassoulis 2001). Although algebraically the effect of incorporating weight restrictions in DEA models is clear, their practical (managerial, economic, technological) meaning has been somewhat obscure. This ambiguity gave rise to different approaches used to construct such restrictions. In most cases these approaches are based on the perceived importance of different inputs and outputs or their monetary value. In some reported

2 studies, the weight restrictions used have no apparent basis at all and are justified only by the need to improve the discrimination of the model. The price to pay for using weight restrictions in DEA models without linking them to specific technological realities of the production process under consideration is the loss of a clear meaning of what the efficiency means. Without weight restrictions, the efficiency of any DMU characterises the extent to which all inputs (in the input-oriented scenario) or outputs (in the output-oriented scenario) can be proportionally improved while the DMU under consideration remains feasible. In models with weight restrictions this is no longer true, and therefore the radial nature of efficiency is no longer observed (Allen et al 1997). In this respect it would be fair to say that the use of weight restrictions based on the various approaches noted above does not resolve the problem of low discrimination but simply transforms it into the problem of interpreting the results of analysis. Of the two mutually dual forms of linear DEA models, both under constant (Charnes et al 1978) and variable (Banker et al 1984) returns-to-scale assumptions (CRS and VRS, respectively), the envelopment form has a clear economic meaning (Cooper et al 2000, Thanassoulis 2001). Yet it is the multiplier form, similar in many respects to some models of multiple-criteria decision analysis, in which the weight restrictions are actually incorporated. Since the problem with the economic meaning of efficiency in the presence of weight restrictions arises in the envelopment form, it is this form, and not the multiplier one, in which conditions on weight restrictions should be sought in order to make the interpretation of efficiency clear. Each linear weight restriction, in the multiplier form, generates additional terms in the envelopment form. In this paper, we show that these terms can be thought of as the trade-offs between the inputs and/or outputs. Using the explicit formula relating these trade-offs to weight restrictions, the latter can be evaluated to ensure that the trade-offs in the envelopment form are always feasible. We call this approach to the construction of weight restrictions the trade-off approach. This incorporates, as a special case, the approach to the evaluation of weight bounds in the case of a single input, developed by Dyson and Thanassoulis (1988). If the trade-off approach is used, the production possibility sets (PPS) of the CRS or VRS models are expanded in the way which ensures that any composite unit constructed in the envelopment form is feasible. This implies that the unit under

3 assessment is always projected in a radial fashion on the feasible target unit and, therefore, the efficiency measure is radial, as in the case without weight restrictions. We take this observation further and prove that the trade-off approach is not just an approach, which preserves the radial nature of efficiency, but that it is the only one which does so. We call this result the fundamental theorem of weight restrictions. The importance of this result to DEA is that it explains the origin of the difficulties surrounding the use of weight restrictions and gives a constructive answer to the traditionally difficult questions, from what weight restrictions mean to how to interpret the efficiency scores. The trade-off approach also resolves more subtle issues related to the use of weight restrictions. Among these are the use of weight restrictions in VRS DEA models, practical advantages of homogeneous weight restrictions over nonhomogeneous, and computational procedures. These issues are addressed at the end of this paper.

2. An Example: Using Trade-offs to Construct Weight Restrictions In this section, we use a simple example involving university departments to show how a correspondence can be established between the weight restrictions, in the multiplier form, and the trade-offs, in the envelopment form of the CRS model. We use this correspondence to construct the weight restrictions, which have a clear managerial meaning. Table 1 Department The data set Undergraduate students A B C D E F 1540 1408 690 674 1686 982 Master students 154 186 59 73 197 63 59 23 76 90 12 15 Publications Teaching staff 100 120 50 67 98 76 Research staff 70 123 20 17 20 12

4 The model without weight restrictions. Consider the following example involving six hypothetical university departments (Table 1). Assuming proportionality between the two inputs (teaching and research staff) and the three outputs (undergraduate students, masters and publications), we can use the CRS model for the efficiency assessment. To be more specific, we shall utilise the linear multiplier form in which the total weighted input is normalised. For example, the model for the assessment of efficiency of department A is as follows: Maximise 1540u1 + 154u2 + 59u3 Subject to: 100v1 + 70v2 = 1 1540u1 + 154u2 + 59u3 - 100v1 - 70v2 0 1408u1 + 186u2 + 23u3 - 120v1 - 123v2 0 690u1 + 59u2 + 76u3 - 50v1 - 20v2 0 674u1 + 73u2 + 90u3 - 67v1 - 17v2 0 1686u1 + 197u2 + 12u3 - 98v1 - 20v2 0 982u1 + 63u2 + 15u3 - 76v1 - 12v2 0 u1, u2, u3, v1, v2 0 The efficiency of all departments and the corresponding optimal weights are shown in Table 2. (All models in this paper were solved exactly as stated using the commercially available optimiser LINDO and the results rounded to four decimal places.) Since four out of six departments are efficient, and the fifth one (department A) is just under the full radial efficiency of 100%, the above model is not sufficiently discriminating. (Strictly speaking, from Table 2 we can only conclude that departments C to F are 100% efficient in the radial sense. The second optimisation stage of the algorithm of Ali and Seiford (1993) performed in this case confirms that none of these four units exhibits mix inefficiency (Cooper et al 2000) and therefore units C to F are fully efficient in the Pareto sense.) The low discrimination of the model can be partly attributed to the relatively high number of inputs and outputs in comparison to the number of units under assessment. The fact that some of the input and output weights are equal to zero is another factor apparently contributing to the low discrimination. For example, department A achieves its relative efficiency 96.2% by assigning zero weights to (1)

5 master students and research staff. This is equivalent to leaving out master students and research staff from the model, which appears inappropriate because both performance indicators are obviously relevant to the efficiency assessment. Table 2 Department A B C D E F Optimal weights and efficiency in the CRS model without weight restrictions u1 0.0006 0 0 0 0 0.0009 u2 0 0.004 0.0096 0.0068 0.0051 0 u3 0.0014 0.0024 0.0057 0.0056 0 0.0081 v1 0.01 0.0083 0.02 0.0121 0.0102 0.0021 v2 0 0 0 0.011 0 0.0699 efficiency 96.20% 79.88% 100.00% 100.00% 100.00% 100.00%

In fact, not only zero but any unreasonably small or large weights may also be the reason of insufficient discrimination. For example, in the case of department F, the weight v2 associated with research staff is over 33 times as large as the weight v1 associated with teaching staff. As we shall see below, this ratio does not make sense if the trade-off between the two categories of staff is taken into account (inequality (9)). Translating weight restrictions to production trade-offs. Assume that, in order to improve the discrimination of the model, we wish to incorporate some weight restrictions. Ideally, by specifying certain proportions (or boundaries of such proportions) between the input and/or output weights, we should be able to make any extreme values, including zeros, infeasible. The most commonly used weight restrictions are homogeneous, which in our case can be represented in the following general form: a1 u1 + a2 u2 + a3 u3 - b1 v1 - b2 v2 0, (2)

where each of the coefficients a1, a2, a3, b1, b2 can be positive, zero or negative. (If at least one of the coefficients at, t = 1, 2, 3, and one of the coefficients bt, t = 1, 2, are non-zero, the weight restriction (2) is called linked, as it links input to output weights.)

6 Often, only two of the coefficients in (2) are non-zero. For example, the upper bound on the ratio of the first two output weights u1 / u2 3 translates, after

linearisation, into u1 - 3u3 0 , which fits into the general formula (2). The evaluation of the coefficients a1, a2, a3, b1 and b2 is often based on the perceived importance of the inputs and outputs, or monetary considerations. The most important drawback of these approaches is not, as it first appears, in the subjectivity of the notion of importance or volatility of monetary valuations. The fundamental problem with these approaches is that they generally do not represent the technological realities of a specific production process. If the weight restriction (2) is incorporated in model (1), its dual envelopment form transforms to the following model, where the new variable r is dual to constraint (2): Minimise q Subject to: 1540l1 + 1408l2 + 690l3 + 674l4 + 1686l5 + 982l6 154l1 + 186l2 + 59l3 + 73l4 + 197l5 + 63l6 59l1 + 23l2 + 76l3 + 90l4 + 12l5 + 15l6 100l1 + 120l2 + 50l3 + 67l4 + 98l5 + 76l6 70l1 + 123l2 + 20l3 + 17l4 + 20l5 + 12l6
l1, l2, l3, l4, l5, l6, r 0, q free.

(3) + a1r 1540 + a2r 154 + a3r 59 + b1r 100q + b2r 70q

In model (3), the first six terms represent a composite DMU feasible in the PPS of the CRS model. The last term on the left-hand side (LHS) is a modification of this composite DMU. Suppose that such a modification is a feasible trade-off, that is it is deemed possible to change the outputs by the vector (a1, a2, a3) provided the inputs are changed by the vector (b1, b2), in proportion r 0. (The notion of a feasible trade-off should not be confused with the close economic concept of marginal rate of substitution. The latter reflects the exact proportions in which the inputs and outputs are changing on the efficient boundary of the PPS and is generally different for different efficient units. The feasible trade-off does not have to be exact and, if relatively undemanding (conservative), may be applicable to different units.)

7 If the above assumption is correct, the LHS of model (3) represents the feasible DMU obtained from the composite DMU by applying the feasible trade-off. (This means that the PPS of model (3) is broader than the PPS of the CRS model.) Therefore, the target unit (1540, 154, 59, 100q, 70q) on the right-hand side is also feasible, as it is weakly dominated by the unit on the LHS. Consequently q is (exactly as in the case without weight restrictions) the contraction factor by which the inputs of unit A can be scaled down while the unit remains feasible. In other words, if the weight restriction (2) generates the feasible trade-off in the envelopment form (3), the radial nature of efficiency q is preserved. Below we show how weight restrictions in the form (2) can be constructed by taking into account the corresponding trade-offs in model (3). The theoretical basis of this approach is discussed after this example.
Undergraduate students versus masters. From Table 2 we observe that every

department places a zero weight on either undergraduate or master students. By specifying strictly positive lower and upper bounds on the ratio of these two weights, we can eliminate this situation. (There may, of course, be alternative optimal weights, not represented in Table 2. By incorporating weight restrictions we shall force the model to identify these if they comply with the specified bounds.) We shall first employ the following judgement: no department can claim extra resources (teaching and research staff) if the number of undergraduate students is reduced by 2 and the number of master students is increased by 1. It is also understood that the research output should not be affected by such a swap. (It appears safe to assume that master students do not require much more resources than undergraduate students (especially those in the final year), so the proportion 2 to 1 seems defendable from the technology perspective.) This judgement generates, in the notation used in model (3), the following trade-off: (a1, a2, a3) = ( -2, 1, 0); (b1, b2) = (0, 0).

This can be read as follows: two undergraduate students out, one master in is feasible provided nothing else changes. According to the inequality (2), the above translates into the following weight restriction:
-2u1 + u2 0.

(4)

8 Note that the inequality (4) allows u1 to be positive and u2 equal to zero. To deal with this situation, consider the following judgement: no extra resources (teaching and research staff) are needed if the number of undergraduate students is increased by 1 and the number of master students is reduced by 1. The corresponding trade-off is represented as: (a1, a2, a3) = ( 1, -1, 0); (b1, b2) = (0, 0),

which is equivalent to the following weight restriction: u1 - u2 0. (5)

The two inequalities (4) and (5) ensure that neither weight u1 nor u2 can be zero if the other weight is positive. If both weights are positive, the ratio u2/u1 is in the range from 1 to 2.
Table 3 Optimal weights and efficiency in the model with restrictions (4) and (5)

Department A B C D E F

u1 0.0005 0.0004 0.001 0.0006 0.0005 0.0008

u2 0.0005 0.0008 0.0018 0.0012 0.0009 0.0008

u3 0.0015 0.0014 0.0033 0.0055 0.0041 0.0089

v1 0.01 0.0083 0.02 0.009 0.0067 0

v2 0 0 0 0.0232 0.0172 0.0833

efficiency 95.62% 71.66% 100.00% 100.00% 100.00% 99.89%

By solving the multiplier model with weight restrictions (4) and (5), we obtain the results as shown in Table 3. All the new weights u1 and u2 are positive and within the proportions (4) and (5). Note also that the discrimination of the model has slightly improved, as the efficiency of departments A and B is lower compared to Table 2, and there is some marginal radial inefficiency detected in unit F.
Research staff and publications. As seen from Table 3, three departments have a

zero weight associated with research staff, while the weight assigned to their research

9 output is positive. By linking the two weights in one inequality, this combination can be made infeasible. A cautious judgement, which all departments must accept, might suggest that each research member should be able to publish a paper at least once in two years. Symbolically, this can be represented by the following formal trade-off: (a1, a2, a3) = ( 0, 0, 0.5); (b1, b2) = (0, 1),

which means that, if the number of research staff is increased by 1 (that is b2 = 1), then the number of publications should increase by at least 0.5 (a3 = 0.5). As follows from (2), this judgement results in the linked weight restriction: 0.5u3 - v2 0.
Table 4 Optimal weights and efficiency in the model with restrictions (4) - (6)

(6)

Department A B C D E F

u1 0.0005 0.0004 0.0009 0.0006 0.0005 0.0008

u2 0.0005 0.0008 0.0018 0.0012 0.0009 0.0008

u3 0.0016 0 0.0035 0.0055 0.0041 0.0089

v1 0.0094 0.0083 0.0193 0.009 0.0067 0

v2 0.0008 0 0.0018 0.0232 0.0172 0.0833

efficiency 92.37% 69.89% 100.00% 100.00% 100.00% 99.89%

By incorporating the inequality (6), together with (4) and (5), into the multiplier form, we obtain the results as in Table 4, which are more discriminating than those in Table 3. Interestingly, in the case of department B, both weights u3 and v2 are equal to zero and formally satisfy (6). It is clear that, in order to make these weights positive, we should link u3 or v2 to some other (positive) weights in the table.
Teaching staff and students. In Table 4, the zero weight v1 associated with the

teaching staff of department F, while the weights u1 and u2 are positive, makes no sense because this means that the teaching output of this department is taken into account without considering the resources used to produce it. A simple way to remedy

10 this situation is to link the teaching output to teaching staff by means of a weight restriction. By stating that any department can increase the number of u/g students by 5 provided there is one additional teaching post, the following trade-off is obtained: (a1, a2, a3) = (5, 0, 0); This translates into the linked weight restriction: 5u1 - v1 0. (7) (b1, b2) = (1, 0).

Note that the increase of the student numbers by 5 might be considered by some departments as inadequately low to justify the introduction of a teaching post. However, the inequality (7) does not state that this number is adequate. All it states is that the increase of the student population by 5 is feasible. This is therefore, only a safe lower bound, which must be accepted by all departments for the model to be reliable and trusted. (An alternative interpretation of the restriction (7) is that no university can claim to need teaching staff in proportion exceeding 1 staff per 5 students.)
Table 5 Optimal weights and efficiency in the model with restrictions (4) - (7)

Department A B C D E F

u1 0.0005 0.0004 0.0009 0.0006 0.0005 0.0008

u2 0.0005 0.0008 0.0018 0.0006 0.001 0.0008

u3 0.0016 0 0.0035 0.006 0 0.0075

v1 0.0094 0.0083 0.0193 0.0031 0.0102 0.0039

v2 0.0008 0 0.0018 0.0467 0 0.0587

efficiency 92.37% 69.89% 100.00% 100.00% 100.00% 92.58%

Adding the weight restriction (7) to the model makes the weight v1 strictly positive for all departments and further improves discrimination (Table 5). An interesting side effect of the restriction (7) is that its introduction has changed the weights u3 and v2 associated with unit E from positive values (in Table 4) to zero values (in Table 5). Simple computations show that the set of positive weights from

11 Table 4 (for unit E) is also optimal in the presence of weight restriction (7), and therefore we are simply observing an alternative optimal solution.
Teaching versus research output. One possible way to deal with the zero weights u3

and v2 in Table 5 is to link the teaching output to research publications, by evaluating the time it might take to do research and produce a quality paper. Since we might have little experience in evaluating this type of trade-offs, only a very conservative estimate would be trusted. Taking into account that a rate of more than 8 students per one teaching post is not uncommon and, at the same time, it would be unrealistic to expect, on a consistent basis, more than 3 - 4 quality publications from a lecturer on a year-long study leave, we might arrive at the following judgment: if the number of publications decreases by 1 paper in a year, the released time should be sufficient to teach 2 extra undergraduate students: (a1, a2, a3) = (2, 0, -1); This results in the following constraint: 2u1 - u3 0. (8) (b1, b2) = (0, 0).

By incorporating all inequalities (4) to (8) in the model, we obtain the results, as in Table 6.

Table 6

Optimal weights and efficiency in the model with restrictions (4) - (8)

Department A B C D E F

u1 0.0005 0.0004 0.0009 0.0006 0.0005 0.0008

u2 0.0005 0.0007 0.0018 0.0012 0.0009 0.0008

u3 0.0016 0.0007 0.0035 0.0055 0.0041 0.0075

v1 0.0094 0.008 0.0193 0.009 0.0067 0.0039

v2 0.0008 0.0004 0.0018 0.0232 0.0172 0.0587

efficiency 92.37% 68.27% 100.00% 100.00% 100.00% 92.58%

12
Teaching versus research staff. Although all optimal weights in Table 6 are strictly

positive, we might want to improve the discrimination of the model further by formulating additional trade-offs. Consider, for example, the following judgement: one researcher can be substituted by 5 teaching staff, without any detriment to the outputs (including publications): (a1, a2, a3) = (0, 0, 0); This translates into the weight restriction:
-5v1 + v2 0.

(b1, b2) = (5, - 1).

(9)

By incorporating all inequalities from (4) to (9) in the model, we obtain the results, as shown in Table 7. The discrimination of the model has again improved, as the efficiency of unit F has dropped from 92.58% to 86.08%.

Table 7

Optimal weights and efficiency in the model with restrictions (4) - (9)

Department A B C D E F

u1 0.0005 0.0004 0.0009 0.0006 0.0005 0.0007

u2 0.0005 0.0007 0.0018 0.0012 0.0009 0.0007

u3 0.0016 0.0007 0.0035 0.0055 0.0041 0.0063

v1 0.0094 0.008 0.0193 0.009 0.0067 0.0074

v2 0.0008 0.0004 0.0018 0.0232 0.0172 0.0368

efficiency 92.37% 68.27% 100.00% 100.00% 100.00% 86.08%

Judgements involving multiple factors. The general form (2) allows us to specify

meaningful weight restrictions involving more than two weights at a time. We shall consider two examples of such restrictions. When the weight restriction (9) was being constructed, it was assumed that replacing one researcher by five teaching staff should not have a detrimental effect on any of the outputs. Although true, this judgement could be made more demanding without compromising its validity. Indeed, the specified ratio of 5:1 between teaching

13 and research staff ensures that the published output does not decrease. However, as in the construction of the weight restriction (7), we could assume that the number of undergraduate students could go up by at least 5 for each teaching post introduced, that is by 25 in total. We can, therefore, formulate the following trade-off, which appears to be entirely plausible: (a1, a2, a3) = (25, 0, 0); and translates into the weight restriction: 25u1 -5v1 + v2 0. This restriction obviously makes (9) redundant. Now consider another situation by assuming that one teaching post is replaced by one research position. Even in the worst-case scenario no department should loose more than, say, 20 undergraduate students. At the same time, it is not unrealistic to expect the increase of publications by at least 0.3 papers a year because research staff should publish more than teaching staff. These estimates result in the following feasible trade-off, which involves two inputs and two outputs at once, and should be acceptable to all departments: (a1, a2, a3) = ( -20, 0, 0.3); This translates into the weight restriction:
-20u1 + 0.3u3 + v1 - v2 0.

(b1, b2) = (5, - 1),

(10)

(b1, b2) = ( -1, 1).

(11)

The above weight restrictions are based on conservative judgements about the production process. Although, naturally, we would want to use more rather than less demanding trade-offs to boost the discrimination of the model, this temptation should be avoided in order to preserve the realism of the model. On the other hand, there is no penalty for using undemanding trade-offs, as, in the worst case, the weight restrictions based on such trade-offs will simply become redundant. As Table 8 shows, the weight restrictions (10) and (11), although relatively weak, are not redundant and contribute to further improvement of the discrimination of the model. In fact, the impact of every single weight restriction used above on the overall table of efficiency was relatively limited. However, their cumulative impact is obvious from simple comparison of Table 8 with the original Table 2.

14
Table 8 Optimal weights and efficiency in the model with restrictions (4) - (8), (10) and (11)

Department A B C D E F

u1 0.0005 0.0004 0.0009 0.0007 0.0005 0.0007

u2 0.0005 0.0006 0.0009 0.0007 0.0009 0.0007

u3 0.0016 0.0008 0.0042 0.0055 0.0018 0.0058

v1 0.0094 0.0079 0.0157 0.0085 0.01 0.0089

v2 0.0008 0.0004 0.0106 0.0254 0.0009 0.0268

efficiency 92.37% 67.91% 100.00% 100.00% 100.00% 83.13%

Further discussion. As demonstrated, weight restrictions can be constructed on the

basis of realistic production trade-offs. In the above example, we did not employ any considerations of importance, an example of which is the statement master students are more important than undergraduates for raising the profile of our department from the employers perspective. Nor did we take into account any monetary reasons like master students on the MBA programmes earn us more cash than undergraduates. Certainly, if the importance or monetary considerations were used, the results similar to those in Table 8 could be obtained, where all weights would be non-zero and within the specified ranges. The difference with our approach is in the interpretation of the efficiency scores. As already noted, if the weight restrictions are consistent with feasible tradeoffs, the model preserves the radial nature of efficiency. (The theoretical grounds of this statement are discussed below.) Consider, for example, department A whose efficiency in Table 8 is equal to 92.37%. This means that it should be possible to achieve the level of output of department A by having only 92.37% of its current teaching and research staff. If the weight restrictions (4) - (11) were assessed using the importance or monetary considerations, it would be wrong to state that that the teaching and research staff of department A could be reduced to the level of 92.37% without any detriment

15 to the output. This is because the LHS of the model (3) would not necessarily represent a feasible member of the PPS.

3. Weight Restrictions and Production Trade-offs

In this section we show how different types of weight restrictions translate into different types of trade-offs in the envelopment model. To be specific, we shall consider the multiplier form of the CRS model in which the total weighted input of DMUo = ( X o , Yo ) is normalised: max s.t. uTYo vTXo =1 uT Y - vT X 0 u, v 0. In the above model, X is the mn matrix formed by the columns of input vectors Xj, and Y , the sn matrix with the columns of output vectors Yj, corresponding to observed DMUs j. It is assumed that, for each DMU j, all of its inputs and outputs are nonnegative and at least one input and one output are strictly positive. It is also assumed that each input and each output included in the model is strictly positive for at least one DMU. The components of vectors u and v are the weights associated with the individual outputs and inputs. The superscript T means transposition. Any linear weight restriction, which can be added to model (12), falls into one of the following three categories: Atu - Btv 0, Ctu - Dtv 1, Etu - Ftv -1, t = 1, , L; t = 1, , M; t = 1, , N. (13) (14) (15) (12)

Obviously, weight restrictions in the group (13) are homogeneous, while those in the other two groups are not. (Examples of group (14) and (15) restrictions are the weight bounds u1 0.5 and u1 0.1, which are equivalent to the inequalities 2u1 1 and -10u1 -1 , respectively.)

16 THEOREM 1. The dual to the model (12) with weight restrictions (13) - (15) can be stated in the following form: min s.t.
q
Yl +

(16)

r t AtT + s t CtT + t t EtT

t =1 L t =1 M t =1 t =1

- e = Yo

X l + r t BtT +

s t ( DtT + X o ) +
t =1

t t ( FtT - X o ) + d = qXo
t =1

l, r, s, t, e, d 0, q sign free,

where rt, st and tt are the dual variables corresponding to the weight restrictions and vectors e and d are nonnegative slacks. Assume that only one weight restriction is incorporated in the multiplier model (12). To be specific, let this restriction be in the form Atu - Btv 0, examples of which are inequalities (4) - (11). Then model (16) is reduced to a form similar to (3). This suggests the following possible meaning of the weight restriction under consideration: changing the inputs of the feasible DMU ( X l , Y l ) by the vector r t BtT makes it possible to change the outputs by the vector r t AtT . Similarly, the terms of the other two groups in model (16) can also be equated to the trade-offs with a clear managerial meaning. More specifically, the changes of the outputs by the vectors CtT and EtT (in respective proportions st and tt) are possible given the inputs change by the vectors DtT + Xo and FtT - X o , in the same proportions. Since a priori we do not know the values of l, r, s and t, the above trade-offs should be sufficiently conservative in order to be valid for any such l, r, s and t feasible in model (16). (A practical way to overcome this demanding theoretical assumption is discussed in section 7.)
4. Weight Restrictions and the PPS

In this section we show that, if the trade-offs generated by the weight restrictions are feasible, the PPS is redefined (expanded) and the radial nature of efficiency, in both input and output oriented DEA models, is preserved.

17 From now on, we can reduce model (16) to the less detailed form: min s.t.
q
Yl + Xl +

(17)

p t QtT
t =1 K

- e = Yo

p t PtT
t =1

+ d = qXo

l, p, e, d 0, q sign free,

where K = L + M + N, PtT and QtT are generic notation for the vector columns induced by the weight restrictions (13) - (15), and pt is a generic multiplier replacing
rt, st and tt.

Provided each term (p t PtT , p t QtT ) on the LHS of (17) represents a feasible trade-off between the inputs and/or outputs, we can view the entire LHS of (17) as the result of the following process. Let TCRS be the PPS of the CRS model without weight restrictions. We start with the DMU ( Xl , Y l ) , which is a member of TCRS and therefore feasible. By adding the vector p 1 PT to its inputs, and vector p 1Q1T to the outputs, we obtain the 1 new unit ( X l + p 1 PT , Y l + p 1Q1T ) . If all inputs and outputs of this unit are 1 nonnegative, this unit is feasible, although not necessarily in TCRS. This logically follows from the judgement that the trade-off (p 1 PT , p 1Q1T ) is feasible. By making 1 such a judgement, we expand the PPS of the CRS model. This process is continued by consecutive addition of the terms (p t PtT , p t QtT ) ,
t = 2,..., K , to the above unit. Assuming that all the inputs and outputs obtained in this
process are nonnegative, we conclude that the unit ( X , Y ) , where

X = Xl + p t Pt T ,
t =1

Y = Y l + p t QtT ,
t =1

is a feasible DMU.
Finally, we add the nonnegative vector d to the input vector X and subtract the nonnegative vector e from the output vector Y , which proves, using the free

disposability, that the unit represented by the entire LHS of model (17) is feasible.

18 Obviously, the above logic does not work if, at some stage in the above process, some inputs or outputs become negative. This can, however, be overcome by splitting the coefficients pt and slacks e and d into sums of component terms and performing the computations on the LHS of (17) in a different order (Podinovski 2000). The above procedure explains the rationale behind the following definition of the PPS TWR. (The subscript WR stands for weight restrictions.)

DEFINITION 1. The production possibility set TWR is the set of all input and output vectors (X, Y) such that X 0, Y 0 and Y = Yl +

p t QtT - e,
t =1

X = Xl +

p t PtT + d,
t =1

(18)

for some l, p, e, d 0. The PPS TWR includes the PPS TCRS of the standard CRS model as a core subset from which new feasible DMUs are obtained by applying the feasible tradeoffs in different proportions and using free disposability. Interestingly, Charnes et al (1989), Roll et al (1991) and Halme and Korhonen (2000) also note that the incorporation of weight restrictions changes the PPS of the model. They stop short, however, of suggesting that the induced terms in the envelopment form can be viewed as production trade-offs and exploring the economic rationale behind the change of the PPS. It is important to note that the target DMU (q * X o , Yo ) obtained by solving model (17) is a member of the PPS TWR. This means that, if the trade-offs induced by the weight restrictions (13) - (15) according to the explicit correspondence established by model (16) are feasible, the target unit (q * X o , Yo ) is feasible and the radial nature of efficiency is preserved. A question remains whether the radial nature of efficiency can be preserved without making the weight restrictions consistent with the production trade-offs. A negative answer to this question is obtained in the next section.

19
5. The Fundamental Theorem

In this section we show that the only way to preserve the radial nature of efficiency in the CRS model with weight restrictions is to make the latter consistent with production trade-offs, in the sense of model (16). Before proceeding further, we need to define more precisely what we mean by calling the efficiency measure (17) radial. In the input-oriented linear CRS model, any DMUo is projected on TCRS in a radial fashion, by proportional contraction of the input vector Xo. This observation is true regardless of whether DMUo is observed, composite or dominated, that is DMUo can be any member of TCRS. The above allows us to give the definition of a radial efficiency measure in the case involving weight restrictions: DEFINITION 2. The measure of efficiency obtained by solving model (17) is radial if, for any DMUo from the set TCRS, the target DMU (q * X o , Yo ) is feasible. The term feasible in the above definition needs explaining. Obviously, the target unit (q * X o , Yo ) is not generally in the set TCRS, regardless of the way in which the weight restrictions (13) - (15) are assessed. Therefore, we can say that the target unit (q * X o , Yo ) is feasible only if the PPS TCRS is expanded in a certain wellmotivated way. One way to do so is to expand TCRS to the PPS TWR, as introduced by Definition 1. The feasibility of any unit from the set TWR follows logically from the assumption that all trade-offs generated by the weight restrictions are feasible. We now want to prove that not only is the expansion of the set TCRS to TWR a possible way to preserve the radial nature of efficiency, but that it is the minimal necessary expansion for this purpose.
LEMMA 1. Consider any pair ( X , Y ) represented in the form (18) and assume that all components of X and Y are strictly positive. Then there exists a DMUo

which is feasible in the CRS model and such that, for its radial projection (q * X o , Yo )
in model (17), the following vector inequalities are true: q * X o X and Yo Y . (In words, the radial projection (q * X o , Yo ) either outperforms ( X , Y ) or is equal to it.)

20 The above lemma implies that, if the radial projection (q * X o , Yo ) is feasible

(which we must assume for the measure of efficiency (17) to be radial), then ( X , Y ) is

feasible, as the latter is dominated by the former. Therefore, for the measure (17) to be
radial, every member ( X , Y ) of the PPS TWR must be feasible. In particular, this means that every unit ( X , Y ) from the set TWR of the

following form:

X = X l + p t PtT ,

Y = Y l + p t QtT ,

must be feasible. Since the composite unit ( Xl , Y l ) is feasible, and the modification of its inputs, by the vector p t PtT , and outputs, by the vector p t QtT , results in the
feasible unit ( X , Y ) , such a modification is, by definition, a feasible trade-off. In other

words, for the efficiency measure (17) to be radial, all the trade-offs generated by the weight restrictions must be feasible. Combining this conclusion with the results of the previous section, we obtain THEOREM 2. (The fundamental theorem of weight restrictions). The radial nature of efficiency in the CRS DEA model with weight restrictions (13) - (15) is preserved if and only if these restrictions translate into the feasible trade-offs in the envelopment form (16). The above theorem implies that the trade-off method of assessment of weight restrictions is the only approach, which preserves the standard economic interpretation of efficiency (17) as the feasible input-contraction factor. In practice it may be difficult to specify a direct trade-off between certain inputs and/or outputs of the model because an explicit rate of substitution between such factors may be unclear. Some alternative approaches, for example those involving importance considerations, might appear more appealing in such cases. However, as Theorem 2 shows, these alternative approaches will not solve the problem but simply shift the difficulty from the assessment of the trade-off to the interpretation of the efficiency score, which could no longer be regarded as a radial measure.

21
6. Dealing with Practical Difficulties

In this section we address some difficulties which arise when evaluating the trade-offs between the outputs or (more often) inputs which do not clearly substitute for each other. In situations like this it might be useful to answer the following question in the first place: why is a certain weight restriction (or trade-off) needed? An answer to this question might itself suggest a way to overcome the difficulty we face. As an illustration, let us refer to the above example involving university departments. In Table 3, the optimal weight v1 attached to the teaching staff of units A, B and C is strictly positive, while the weight v2 attached to their research staff is zero. (Although v2 finally becomes positive in Table 6 after the introduction of weight restrictions (6) - (8), for the sake of discussion here we shall assume that these restrictions have not been incorporated yet, that is the only weight restrictions used have been (4) and (5), resulting in Table 3.) A typical judgement as to why a zero weight v2 should not be allowed is that this is equivalent to leaving out research staff from the set of inputs. Consequently, the only effective input of the model is teaching staff, which is inappropriate. To make the case v2 = 0 impossible, we need to specify how many research staff could substitute one teaching member. (For example, if we thought that ten research staff would do, the corresponding weight restriction would be v1 - 10v2 0 , rendering the case of a positive v1 and zero v2 infeasible.) Unfortunately, an estimate like this is unreliable because normally (although not always) research staff does not teach. Instead of forcing ourselves into accepting the trade-off, which probably does not even exist, we might want to revisit the question why the zero weight v2 is inappropriate. A possible answer here is that the volume of research output (publications) is meaningless as a performance indicator without counting the research staff contributing to this output. From this we conclude that it is not the fact that v1 is positive and v2 is zero which should be of our major concern. A more important issue is that the weight u3 attached to publications is positive, while the weight attached to researchers is zero. This observation suggests that the issue of the zero weight v2 in Table 3 could be overcome by specifying the trade-off between research staff and publications. This

22 is a relatively simple task, which results in the weight restriction (6). Consequently, in Table 4, all units but one have the weight v2 strictly positive. Only in the case of unit B is v2 equal to zero. (This is feasible because the linked weight u3 is also zero. This problem is finally resolved by the introduction of the weight restriction (8), which links u3 to u1.) An alternative approach to preventing the case v2 = 0 involves the use of complex trade-offs, in which some of the outputs are also incorporated. An example of this is the weight restriction (11). The use of restrictions of this type is largely a hit-and-miss exercise because, often, they do not directly prevent any of the weights involved, for example v2, from being equal to zero. However, this type of restrictions may still work in some cases and hence is worth trying if no simple alternative restrictions could be found. In particular, if we use the weight restriction (11) in our example, the weight v2 becomes strictly positive in the case of units A and C but still remains equal to zero in the case of unit B.

7. Related Practical Issues The evaluation of trade-offs. The only reason why the target DMU (q * X o , Yo )

obtained by solving the model (17) is feasible is that this target can be obtained by consecutive application of the feasible trade-offs ( PtT , QtT ) , in proportions pt, to the initial composite DMU ( Xl , Y l ) . There is no practical way of knowing in advance what proportions pt and unit ( Xl , Y l ) would be obtained at optimality. More, for different units under assessment, these variables will obviously be different. The above observation suggests that, in evaluating the trade-offs, we should be on a cautious side and specify only those relationships that would be applicable to any DMU and in any proportions, provided all inputs and outputs remain nonnegative. This might not, however, be a realistic assumption. For example, in the case of university departments, substituting 2 undergraduates by 1 master student may be feasible only within certain proportions. Otherwise, taking this to the extreme, we will end up with a department teaching only masters and no undergraduates, which might be deemed infeasible for a number of practical reasons. Fortunately, this demanding assumption of the feasibility of trade-offs in any proportions is not needed and can be reduced to a much simpler condition. This is

23 based on the following mathematical fact proved by Podinovski (2000): the procedure consisting of the consecutive application of trade-offs, by which we logically conclude that the target DMU (q * X o , Yo ) in model (17) is feasible, can always be performed in such a way, that all the intermediate DMUs obtained in the process are contained in the convex hull induced by all observed DMUs (scaled up or down by some factors) and the target DMU (q * X o , Yo ) . We now note that, if any trade-off is feasible, in limited proportions pt, at all these DMUs, which induce the convex hull, then it is feasible in the entire convex hull. This observation implies that we only need to ensure that each trade-off
( PtT , QtT ) is feasible in at least some limited proportion pt if applied to every observed

DMU. (Strictly speaking, we also need to check its validity at the target DMU
(q * X o , Yo ) . However, in practice this stage can almost certainly be ignored because

the target unit is normally in some close proximity to its efficient peer units, which are observed DMUs. Consequently, we could expect the validity of the trade-offs at these peers to extend to the target unit without a need of reassessment.) To demonstrate how this simplified assumption works in practice, refer to the assessment of university departments. More specifically, consider the judgement that the replacement of 2 undergraduate students by 1 master student does not require additional resources. Although this judgement is probably not valid in large proportions, this does not matter for our approach. What is important is that all observed university departments could in principle replace (only once!) two undergraduates by one master student. (That is we do not have to speculate whether it is possible to replace 20 undergraduates by 10 masters, as this is not required for the logical procedure explaining the feasibility of the target units.)

The output-oriented model. All of the results discussed above remain valid (with

some minor modifications) if the multiplier model (12) is replaced by the alternative model in which the total weighted output is normalised. In this case the envelopment model can be written in the following form, which can be obtained by the method similar to that used in the proof of Theorem 1:

24 max s.t.
q
Yl +

(19)

r t AtT +
t =1 L t =1

s t (CtT - Yo ) +
t =1 M

t t ( EtT + Yo ) - e = qYo
t =1

Xl +

r t BtT

t =1

s t DtT

t t FtT
t =1

+ d = Xo

l, r, s, t, e, d 0, q sign free.

By comparing (19) to its input-oriented analogue (16), we conclude that the homogeneous restrictions (13) translate into identical trade-offs in the two envelopment forms. However, the non-homogeneous weight restrictions (14) and (15) induce different trade-offs. Despite this difference, in both input and output-oriented cases the envelopment model can be written in the generic form (17), although the terms
( PtT , QtT ) generated by the same weight restrictions (14) and (15) will be different.

This implies that the PPS TWR will generally be different for the two orientations, unless only homogeneous restrictions (13) are used. This is not surprising because, as noted, the weight restrictions of the groups (14) and (15) induce different trade-offs for two different orientations of the model. However, starting with the model (17), the main results of the paper are invariable with respect to the orientation of the model. In particular, the formulation of Lemma 1 in the output-oriented case remains the same with an obvious substitution of the formula for the target unit. Theorem 2 is obviously unaffected.
Homogeneous versus non-homogeneous restrictions. As follows from models (16)

and (19), the trade-offs induced by non-homogeneous weight restrictions (14) and (15) have significant disadvantages from the practical point of view compared to the homogeneous restrictions (13). Firstly, such trade-offs are dependent on the DMUo under assessment, as the term Xo appears on the input side of these trade-offs. Therefore, the meaning of the same non-homogeneous weight restrictions is different for different units under consideration. It is obviously impractical to re-evaluate the trade-offs every time a new unit is assessed. Secondly, although the exact meaning of the trade-offs corresponding to nonhomogeneous weight restrictions is clear (as discussed after the formulation of model

25 (16)), in practice they may be difficult to assess because all inputs (in the form of vector Xo) are involved at the same time. Thirdly, as noted above, the trade-offs generated by non-homogeneous weight restrictions are different in the input-oriented form (16) and its output-oriented equivalent (19). The homogeneous weight restrictions (13) do not cause any of the above difficulties. They are generally easier to evaluate and, once obtained, remain valid and retain their meaning for any DMUo under consideration, in both input and outputoriented models. In short, there is hardly any practical reason to use non-homogeneous weight restrictions if these are evaluated using the trade-off approach.
Variable returns to scale. The use of weight restrictions in the VRS model has

traditionally been a controversial issue (Thanassoulis and Allen 1998). The underlying problem here is that, under VRS, it is reasonable to expect that the marginal rates of substitution between inputs and/or outputs (and hence the trade-offs, as these two notions are related) will be different for units operating at different scale size. The above problem does not exist under CRS, as the marginal rates of substitution remain constant if the size of units changes. However, the marginal rates of substitution also depend on the mix of inputs and outputs. That is, for different efficient units of similar size (however the notion of size is defined), the marginal rates of substitution are generally different. This means that even under CRS the rates of substitution are different for different units. A practical answer to this concern is the same as discussed above in relation to the issue of making the trade-offs feasible in a large area. Namely, to ensure that the trade-offs are always feasible in the logical procedure used to explain the feasibility of the target units, we only need to check that each trade-off ( PtT , QtT ) is feasible in some limited proportions if applied to every observed DMU. Under the VRS assumption, model (16) has one additional constraint, which normalises the sum of components of vector l to 1. (The definition of the PPS TWR in the case of VRS is also amended by the incorporation of this equation.) Since the form of the trade-offs generated by the weight restrictions (13) - (15) is not affected by switching from CRS to VRS, the meaning of weight restrictions is the same under

26 both assumptions. Consequently, weight restrictions suitable for the CRS model can be used in its VRS analogue, and vice versa.
Computational procedures. In the absence of weight restrictions, the analysis of

efficiency of DMUo is usually performed in two stages using the algorithm of Ali and Seiford (1993). The first stage of this algorithm assesses the radial efficiency of DMUo, while the second stage identifies the mix inefficiency (if it exists) by maximising the sum of component slacks. In the presence of weight restrictions of any kind, the first stage of this procedure involving the minimisation of q in model (16) causes no problems, while the second stage needs to be modified. The problem is that, if the sum of component slacks is maximised as in the standard model, the efficient target produced by this stage for an inefficient DMUo may have negative inputs. A simple intuitive solution to this problem by changing to zero the negative inputs does not generally work because the modified target unit may become inefficient. An example of this phenomenon is given by Podinovski (2000). A new three-stage algorithm for solving the models with weight restrictions was developed in Podinovski (2000). Its first stage is identical to that introduced by Ali and Seiford. A technical discussion of the further two stages, aimed at the identification of efficient targets and peers of inefficient DMUs, is beyond the scope of this paper.
8. Conclusion

In this paper we introduced the trade-off approach to the evaluation of weight restrictions in DEA models. In comparison with the most commonly used alternative approaches, in which weight restrictions reflect the perceived importance of inputs and outputs, or are based on cost considerations, the trade-off approach has the advantage of preserving the radial nature of the efficiency measure. We have proved that the trade-off approach is the only one which preserves this important characteristic of efficiency. An example involving the assessment of efficiency of university departments was used to explain the application of the trade-off approach. Some issues related to the practical use of this approach were also addressed. In particular, it was pointed out that the trade-offs need only to be feasible at the observed DMUs, and in some small

27 proportions. This guarantees that all target units obtained for the inefficient DMUs are feasible, both under the CRS and VRS assumptions. It was also shown that the use of non-homogeneous weight restrictions (e.g. absolute weight bounds), although theoretically possible, causes various practical difficulties. In comparison, homogeneous restrictions do not have these drawbacks.

28
Appendix 1: Proofs Proof of Theorem 1.

Consider the dual to model (12) with restrictions (13) - (15): min s.t. z + 1, s - 1,t
Y l + AT r + C T s + E Tt Yo zX o - X l - BT r - DT s - F Tt 0

l, r, s, t 0, z free,

where the symbol , denotes the scalar product. Define q = z + 1, s - 1,t substitute z = q - 1, s + 1,t
N

and

into the dual. Since

1, s X o = (s t X o ) and
t =1

1,t X o = (t t X o ) , by rearranging the terms on the LHS and introducing the slack
t =1

vectors e and d, we obtain (16).

Proof of Lemma 1.

Let us first show that, for a sufficiently large a > 0, the DMU (aX , Y ) is a member of

% % TCRS. Define DMU ( X , Y ) as the simple average of all observed DMUs. Due to the % assumption made after the formulation of model (12), all components of vectors X % % and Y are strictly positive. Then Y b Y for a sufficiently large b > 0 . Since all % % components of X are strictly positive, a X b X for a sufficiently large a > 0 . Then
% % ( b X , b Y ) dominates (aX , Y ) in the weak Pareto sense. Since, due to the CRS

assumption, the former unit is a member of TCRS, the latter is also in this set (due to the weak disposability assumption).
Define DMUo = (aX , Y ) and substitute this DMU to the right-hand side of

(17). Then the value q = 1/a is attainable (at l = l and m = m , which correspond to
DMU ( X , Y ) in the representation (18)). Therefore, at optimality, q* 1/a. If q* < 1/a, the target DMU (q *aX , Y ) dominates ( X , Y ) in the Pareto sense, otherwise, the

two units coincide.

29
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