Efficiency decomposition in two-stage data envelopment analysis: An application to non-life insurance companies in Taiwan

The efficiency of decision processes which can be divided into two stages has been measured for the whole process as well as for each stage independently by using the conventional data envelopment analysis (DEA) methodology in order to identify the causes of inefficiency. This paper modifies the conventional DEA model by taking into account the series relationship of the two sub-processes within the whole process. Under this framework, the efficiency of the whole process can be decomposed into the product of the efficiencies of the two sub-processes. In addition to this sound mathematical property, the case of Taiwanese non-life insurance companies shows that some unusual results which have appeared in the independent model do not exist in the relational model. In other words, the relational model developed in this paper is more reliable in measuring the efficiencies and consequently is capable of identifying the causes of inefficiency more accurately. Based on the structure of the model, the idea of efficiency decomposition can be extended to systems composed of multiple stages connected in series. (c) 2007 Elsevier B.V. All rights reserved.