Evaluating eco-efficiency with data envelopment analysis: an analytical reexamination

This paper reexamines the unintended consequences of the two widely cited models for measuring environmental efficiency—the hyperbolic efficiency model (HEM) and directional distance function (DDF). I prove the existence of three main problems: (1) these two models are not monotonic in undesirable outputs (i.e., a firm’s efficiency may increase when polluting more, and vice versa), (2) strongly dominated firms may appear efficient, and (3) some firms’ environmental efficiency scores may be computed against strongly dominated points. Using the supply-chain carbon emissions data from the 50 major U.S. manufacturing companies, I empirically compare these two models with a weighted additive DEA model. The empirical results corroborate the analytical findings that the DDF and HEM models can generate spurious efficiency estimates and must be used with extreme caution.