A dynamic efficiency model using data envelopment analysis

Changes in productivity due to technological progress or regress are incorporated in models of data envelopment analysis (DEA) in two ways: either through a network technology or in terms of a capacity variable or capital input embodying technical progress. The second way is analyzed here in terms of time-varying capital inputs due to the changes in input prices over time. This provides an optimal control theoretic view of the time path of capital inputs which minimizes a discounted sum of total input costs for each DMU. The cost of risk aversion and the adjustment cost of input price fluctuations may then be minimized in an extended DEA model framework. These extensions of the DEA model are analyzed here and illustrated by an empirical application to international airlines data.