Adding Counterfactual Interpretation to DEA

Abstract

This paper investigates the integration of the Synthetic Control Method (SCM), a proven method to analyze an impact of policy interventions, and Data Envelopment Analysis (DEA), a well-known mathematical technique for measuring relative efficiency of decision-making units with multiple inputs and multiple outputs, to evaluate the effect of policy interventions on the efficiency of decision-making unit. Specifically, this paper applies these methodologies to assess the efficiency of Serbian banks over a given period, focusing on the influence of a merger between two principal banks on their operational performance, and answering a counterfactual question whether efficiency of a bank would be the same if a merger did not happen. The study demonstrates that SCM can be an effective tool for analyzing the repercussions of policy measures on decision-making unit efficiency. In other words, we suggest combining these two methods in the future, in order to conclude whether an intervention really has an impact on efficiency.