Scaling production and improving efficiency in DEA: An interactive approach

DEA models help a DMU to detect its (in-)efficiency and to improve activities, if necessary. Efficiency is only one economic aim for a decision-maker; however, up- or downsizing might be a second one. Improving efficiency is the main topic in DEA; the long-term strategy towards the right production size should attract our attention as well. Not always the management of a DMU primarily focuses on technical efficiency but rather is interested in gaining scale effects. In this paper, a formula for returns to scale (RTS) is developed, and this formula is even applicable for interior points of technology. Particularly, technical and scale inefficient DMUs need sophisticated instruments to improve their situation. Considering RTS as well as efficiency, in this paper, we give an advice for each DMU to find an economically reliable path from its actual situation to better activities and finally to most productive scale size (mpss), perhaps. For realizing this path, we propose an interactive algorithm, thus harmonizing the scientific findings and the interests of the management. Small numerical examples illustrate such paths for selected DMUs; an empirical application in theatre management completes the contribution.