A two-stage method for improving discrimination and variable selection in DEA models

Abstract

One of the main challenges when applying data envelopment analysis (DEA) is the selection of appropriate input and output variables. This paper addresses this important problem using a novel two-stage method. In the first stage, we use entropy theory to generate a comprehensive efficiency score (CES) of each decision-making unit. In the second stage, we select input and output variables using the Bayesian information criterion, when CES is treated as a dependent variable and the input and output variables are used as explanatory variables. We use stochastic data to demonstrate that our proposed method can improve the discrimination power of DEA and determine the important input and output variables. Finally, we compare the proposed method with principal component analysis using datasets on carbon emissions in China. This comparison demonstrates the practical value of our proposed method.