Super SBI Dynamic Network DEA approach to measuring efficiency in the provision of public services

• Date: 01 March 2018
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/itor.12257

Intl. Trans. in Op. Res. 25 (2018) 715–735

DOI: 10.1111/itor.12257

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Super SBI Dynamic Network DEA approach to measuring

efficiency in the provision of public services

Pl´

acido Morenoaand Sebasti´

an Lozanob

aFacultad de Inform´

atica y Electr´

onica, Escuela Superior Polit´

ecnica de Chimborazo (ESPOCH), Ecuador

bDepartment of Industrial Management I, University of Seville,Spain

E-mail: placido.moreno@espoch.edu.ec [Moreno];slozano@us.es [Lozano]

Received 8 January 2015; received in revised form 13 September 2015; accepted 29 November 2015

Abstract

The current financial crisis has had a significant impact on European governments’ finances and has led

to a series of government interventions to control the public debt and deficit. Therefore, the aim of this

paper is to identify inefficiencies in the management of public finance, such as overspending, unreasonable

debt, and excessive taxes, while maintaining the same level of social welfare. Thus, we propose a two-stage

network data envelopment analysis (DEA) structure that accounts for both allocation of the public budget

and transformation of governmentexpenditures into services to the people and the economy.Financial assets,

debt, and employment have been included as carryover activities over successive periods of time. Finally, a

super-efficiency approachallows discriminating between the efficient European governments. Wehave applied

the proposed approach to the period from fiscal years 2008 to 2012. Results show that not only high-deficit

countries, but also major countries such as Germany and France have performed poorly. The slack-based

measure of inefficiency (SBI) metrics, whosedirectional vector components are defined as the yearly national

GDP,point out the feasible reductions in taxes and debt issuances, along with feasible targets for government

expenditure.

Keywords:Network DEA; Dynamic DEA; super-efficiency; public services; public expenditure; slacks-based inefficiency

1. Introduction

After a long period of credit growth and plentiful availability of liquidity and funds, a downturn in

the U.S. subprime market led to the financial crisis that has hit the global economy in an unprece-

dented way. In fact, the current economic crisis has been the largest since the Great Depression.

At first, the crisis seemed to be a liquidity shortage among banks and financial institutions, but

the collapse of some major banking systems transmitted desolation to the global economy at an

enormous speed.

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2016 The Authors.

International Transactionsin Operational Research C

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716 P. Moreno and S. Lozano / Intl. Trans. in Op. Res. 25 (2018) 715–735

For instance, the European Union (EU) real gross domestic product (GDP) has experienced the

sharpest contraction in its history and the unemployment rate has been rising quickly during the

last few years. Although EU governments have devoted a great deal of effort to implement control

and mitigation policies, the reduction of the large deficit at the taxpayer’s expense has harmed the

aggregate demand and private sector.

This context of global economic crisis and the ways governments finance themselves, by means

of increasing taxation and borrowing, brings into focus the need for efficiency of public finance.

Governments play an essential role in national economies, because of their activities in providing

public services, so it becomes crucial to identify the sources of inefficiency, which mainly arises

through excessive taxes, large debt, and overspending.

OECD policy analysts (Curristine et al., 2007) have long pointed out that the challenge of

mitigating the crisis should be addressed by improving public sector efficiency instead of trying to

maximize the governments’ revenues, that is, through taxation and debt. With respect to literature

assessing the governments’ efficiency, the first concern was the management of public expenditure.

Angelopoulos et al. (2008) used their own performance indicators, which were based on the public

sector outputs, to evaluate the efficiency of public spending in a sample of industrialized countries.

The relationship between government expenditure and its performance was further studied by

Drucker and Geva (2013). Finally, Murak¨

ozy (2012) targeted the optimal size of the public

sector.

Data envelopment analysis (DEA) has also become an important tool to assess the efficiency

of public spending. Afonso et al. (2010), Hauner and Kyobe (2010), and Adam et al. (2011) have

applied DEA to the outcome of public sector activities relative to the resources used, that is, public

expenses. Also, Josifidis et al. (2010) highlighted the inefficiencies of European governments in

providing welfare through social expenditures by means of a DEA model.

Apart from optimizing government expenditures to provide public services, efficiency also lies

in the allocation of income, mainly from taxation. Bierbrauer and Sahm (2010) claimed that the

composition of tax revenue should not be ignored, while Bierbrauer(2009) analyzed the conditions

for optimal taxation. Also, Gemmell and Au (2013) stated the impact of fiscal policies on economic

growth.

However, to the best of our knowledge, the only study taking into account both excesses in taxes

and public expenses as inefficiencies was carried out by Moreno and Lozano (2014b). They pointed

out the relevance of a Network DEA model to provide insight into the management of public

finance, applying it to the U.S. states.

The current paper aims at computing reductions in income and debt, as well as identifying

overspendings in European governments, which have been hit by the economic crisis in an even

sharper way. Indeed, unlike Moreno and Lozano (2014b), the current approach extends Network

DEA toward a dynamic framework, since there are activities, namely financial assets, liabilities

and employment, whose effects on successive years should not be overlooked. A further valuable

contribution made by the paper is the incorporation of the estimation of super-efficiency scores to

the Dynamic Network DEA for discriminating between efficient units.

This paper is organized as follows. Section 2 presents the methodology, that is, Dynamic Network

DEA and its corresponding super-efficiency model, along with the approach to be applied and

details about data. In Section 3, the results of the efficiency assessment are presented and discussed.

The conclusions and further research are provided in Section 4.

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2016 The Authors.

International Transactionsin Operational Research C

2015 International Federation of OperationalResearch Societies