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Decomposing capacity utilization in data envelopment analysis: An application to banks in India

Publication Type : Journal Article

Publisher : European Journal of Operational Research

Source : European Journal of Operational Research, Volume 195, Number 2, p.575-594 (2009)

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Keywords : Actual costs, Banking industries, Capacity utilization, Capacity utilizations, Case studies, Costs, DEA, decomposition, Economic capacities, Economic perspectives, Empirical findings, Excess capacities, Existing methods, Financial sectors, High efficiencies, Hydroelectric power, International journals, Learning experiences, Linear programming, Nonparametric, Optimal capacities, Optimal idle capacity, Potential applications, Production economics, Short runs, SPI-RIT, Technical efficiency

Campus : Coimbatore

School : School of Business

Year : 2009

Abstract : This paper briefly reviews the existing methods of capacity utilization in nonparametric framework from economic perspectives, and then suggests an alternative in the light of limitations therein. In the spirit of work by Coelli et al. [Coelli, T.J., Grifell-Tatje, E., Perelman, S., 2002. Capacity utilisation and profitability: A decomposition of short run profit efficiency. International Journal of Production Economics 79, 261-278], we propose two methods, radial and non-radial, to decompose the input-based physical (technological) capacity utilization into various meaningful components viz., technical inefficiency, ray economic capacity utilization and optimal capacity idleness. A case study of Indian banking industry is taken as an example to illustrate the potential application of these two methods of decomposition. Our two broad empirical findings are that first, competition created after financial sector reforms generates high efficiency growth, and reduces excess capacity; second, the cost gap of the short-run cost from the actual cost is higher for the nationalized banks over the private banks indicating that the former banks, though old, do not reflect their learning experience in their cost minimizing behavior. © 2008 Elsevier B.V. All rights reserved.

Cite this Research Publication : B. Kab Sahoo and Tone, Kc, “Decomposing capacity utilization in data envelopment analysis: An application to banks in India”, European Journal of Operational Research, vol. 195, pp. 575-594, 2009.

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