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Measuring potential sub-unit efficiency to counter the aggregation bias in benchmarking

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Abstract

The paper deals with benchmarking cases where highly aggregated decision making units are in the data set. It is shown that these units—consisting of sub-units which are not further known by the evaluator—are likely to receive an unjustifiable harsh evaluation, here referred to as aggregation bias. To counter this bias, we present an approach which allows to calculate the potential sub-unit efficiency of a decision making unit by taking into account the possible impact of its sub-units’ aggregation without having disaggregated sub-unit data. Based on data envelopment analysis, the approach is operationalized in several ways. Finally, we apply our method to the benchmarking model actually used by the Brazilian Electricity Regulator to measure the cost efficiency of the Brazilian distribution system operators. For this case, our results reveal that the potential effect of the aggregation bias on the operators’ efficiency scores is enormous.

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Acknowledgements

The authors would like to thank the reviewers for their helpful comments. The first author gratefully acknowledges that this work was supported by the Deutsche Forschungsgemeinschaft (DFG) under Grant AH 90/5-1. The third author appreciates that this work was supported by the Fundação de Amparo à Pesquisa do Estado de Minas Gerais (FAPEMIG) and the Companhia Energética de Minas Gerais (CEMIG) under Grant APQ-03165-11; Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES) under Grant 999999.000003/2015-08; Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) under Grant 444375/2015-5.

Funding

This work was supported by Deutsche Forschungsgemeinschaft (DFG) under Grant AH 90/5-1, Fundação de Amparo à Pesquisa do Estado de Minas Gerais (FAPEMIG) and Companhia Energética de Minas Gerais (CEMIG) under Grant APQ-03165-11, Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES) under Grant 999999.000003/2015-08, Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) under Grant 444375/2015-5.

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Authors and Affiliations

  1. Institute of Management Control and Business Accounting, Technische Universität Braunschweig, Fallersleber-Tor-Wall 23, 83100, Brunswick, Germany

    Heinz Ahn

  2. Department of Economics, Copenhagen Business School, Porcelaenshaven 16 A, 2000, Frederiksberg, Denmark

    Peter Bogetoft

  3. Center for Efficiency, Sustainability and Productivity – NESP, Universidade Federal de Minas Gerais, Av. Antonio Carlos, 6627, Pampulha, 31270-901, Belo Horizonte, Minas Gerais, Brazil

    Ana Lopes

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  1. Heinz Ahn
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  2. Peter Bogetoft
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  3. Ana Lopes
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Corresponding author

Correspondence to Heinz Ahn.

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Conflict of interest

Although one of the funds is supported by a company, there is no conflict of interest. The developed approach is universally applicable and of general interest for any benchmarking study.

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Ahn, H., Bogetoft, P. & Lopes, A. Measuring potential sub-unit efficiency to counter the aggregation bias in benchmarking. J Bus Econ 89, 53–77 (2019). https://doi.org/10.1007/s11573-018-0901-0

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  • DOI: https://doi.org/10.1007/s11573-018-0901-0

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