A value efficiency approach to incorporating preference information in data envelopment analysis

We develop a procedure and the requisite theory for incorporating preferenc e information in a novel way in the efficiency analysis of Decision Making Units. The efficiency of Decision Making Units is defined in the spirit of Data Envelopment Analysis (DEA), complemented with Decision Maker's prefere nce information concerning the desirable structure of inputs and outputs. O ur procedure begins by aiding the Decision Maker in searching for the most preferred combination of inputs and outputs of Decision Making Units (for s hort, Most Preferred Solution) which are efficient in DEA. Then, assuming t hat the Decision Maker's Most Preferred Solution maximizes his/her underlyi ng (unknown) value function, we approximate the indifference contour of the value function at this point with its possible tangent hyperplanes. Value Efficiency scores are then calculated for each Decision Making Unit compari ng the inefficient units to units having the same value as the Most Preferr ed Solution. The resulting Value Efficiency scores are optimistic approxima tions of the true scores. The procedure and the resulting efficiency scores are immediately applicable to solving practical problems.