ABSTRACT
As demonstrated above, the estimation of efficiency is based on first identifying a frontier of best practice and measuring firm performance relative to this frontier. However, such frontier is observed in practice and must be estimated from the data. A key step in the DEA or SF estimation is to first identify a list of input and output variables that best describe the industry or firms under analysis. The efficiency estimation is one step, but further analysis is required to enrich the implications the findings and to provide some strategies for efficiency improvement. The chapter provides directions on how to estimate each method, and compare and validate the findings. Given the advantages and disadvantages of each approach, comparing them “is not only necessary, but potentially yields important results and conclusions with respect to the relative merits of the two alternative approaches and the circumstances under which each is most appropriately applied”.
