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Abstract

Most, if not all, production technologies are stochastic. This article demonstrates how data envelopment analysis (DEA) methods can be adapted to accommodate stochastic elements in a state-contingent setting. Specifically, we show how observations on a random input, not under the control of the producer and not known at the time that variable input decisions are made, can be used to partition the state space in a fashion that permits DEA models to approximate an event-specific production technology. The approach proposed in this article uses observed data on random inputs and is easy to implement. After developing the event-specific DEA representation, we apply it to a data set for Western Australian wheat farmers. Our results highlight the need for acknowledging stochastic elements in efficiency analysis.

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