Cross-Efficiency Evaluation Method with Performance Level as a Management Objective in Consideration of Bounded Rationality

Abstract

Abstract According to management by objectives (MBO) theory, the significance of management objectives must be considered as a reference point in a performance evaluation. Cross efficiency evaluation has always been considered to be one of the important performance evaluation methods. However, few studies to date have considered the impact of management objectives on cross efficiency. According to prospect theory, the choice of reference point will cause irrational psychology in decision makers. A management objective is a natural reference point, which will cause a ‘gain and loss’ psychology in enterprises and may create irrational psychology. Performance level is an important index by which to evaluate resource allocation, which in turn can be regarded as an important enterprise management objective. This paper proposes a cross efficiency evaluation method based on performance level. Cross efficiency evaluation models are constructed, based on the irrational psychology that occurs under organization objectives, personal objectives and composite objectives. This method not only considers the bounded rational behavior of enterprises, but is also more flexible. A numerical example is given to illustrate the application of the bounded rational cross efficiency evaluation method in data envelopment analysis (DEA) ranking.

Keywords

• Data envelopment analysis (DEA)
• Cross efficiency evaluation
• Prospect theory
• Bounded rationality
• Performance level