Minimum distance efficiency measure in bank production: A directional slack inefficiency approach

Abstract

In the non-radial efficiency measurement literature, it is common to estimate technical (in)efficiency by maximising weighted slacks primarily from the computational viewpoint. This means that efficiency measures and targets are obtained based on farthest distance projections. However, when the decision making units (DMUs) operate at less than the efficient scale, such modelling approach can be very restrictive. This paper proposes a minimum distance Data Envelopment Analysis (DEA) model in order to evaluate the efficiency of Japanese banking sector over the period 2013–2019. The proposed model is based on Koopmans notion of strong efficiency. When comparing our findings from the minimum distance slack inefficiency model with those against the traditional slack inefficiency model, we find significant differences. These differences are primarily based on the way the benchmark targets have been set in the two methodological frameworks. Finally our finding brings forward the importance and the implications on bank efficiency measurement, when non-feasible targets are set during the bank efficiency evaluation. © Operational Research Society 2021.