Country Performance Evaluation: The DEA Model Approach

This study employs four data envelopment analysis (DEA) models to evaluate the performance efficiency of 21 OECD countries and assess whether the undesirable outputs are over-produced relative to desirable outputs. In evaluating the performance of OECD countries via super-efficiency models, this study focuses on two aspects. First, employing the concept of the Sharpe ratio, we propose another method to deal with undesirable outputs (the unemployment rate, inflation, and air pollution) in DEA. This approach can reveal the relative importance of desirable outputs and undesirable outputs, detect whether undesirable outputs are over-produced, and obtain more accurate efficiency scores. Second, we examine whether knowledge capital can improve a country’s efficiency scores. Our empirical results support the above arguments. In addition, research and development (R&D) expenditures, the proxy variable for knowledge capital, can indeed improve countries’ efficiency scores, implying that the endogenous growth theory is supported in OECD countries. Evidently, whether the undesirable outputs are included in the DEA models and are properly treated is crucial in the evaluation of efficiency values.