Radial and Non-Radial Decompositions of Profit Change: With an Application to Indian Banking

European Journal of Operational Research, Vol. 196, No. 3, pp. 1130-1146, 2009

Posted: 17 Nov 2012

See all articles by Biresh Sahoo

Biresh Sahoo

Xavier Institute of Management

Kaoru Tone

National Graduate Institute for Policy Studies (GRIPS)

Date Written: August 1, 2009

Abstract

Grifell-Tatje and Lovell (Grifell-Tatje, E., Lovell, C.A.K., 1999. Profits and productivity. Management Science 45, 1177-1193) made significant contributions to the literature on the extended radial DEA framework by decomposing profit change into six mutually exclusive components. Their approach, however, poses two basic problems. First, the radial estimates on these components might give conflicting signals about the direction of profit change after the full radial efficiencies are achieved when slacks are present. Second, evaluations of these components, using base-period prices as weights, can be potentially misleading. To address these concerns, we first introduce non-radial DEA models, and then, provide a few strong theoretical arguments in favor of using as weights either current-period prices or an average price covering both periods to value the contributions of each of these components. The Indian banking sector is taken as a case study to illustrate the radial and non-radial decompositions of profit change so as to empirically examine the role of competition on profit change and its drivers. Our broad empirical results are as follows: first, radial and non-radial models yield diametrically opposite results on the contributions of various components. Second, the increasing efficiency change trends in all ownership groups after 2002 indicate that the Government reform process instituted on the banking industry has had a favorable effect on the performance of the Indian banking sector. Third, despite the fact that nationalized banks are the oldest banks, their output and resource allocation behaviors do not reflect their learning experience.

Keywords: Profits, Productivity, Indian banking, DEA (radial and non-radial models)

JEL Classification: D21, D22, D24, C61

Suggested Citation

Sahoo, Biresh K. and Tone, Kaoru, Radial and Non-Radial Decompositions of Profit Change: With an Application to Indian Banking (August 1, 2009). European Journal of Operational Research, Vol. 196, No. 3, pp. 1130-1146, 2009, Available at SSRN: https://ssrn.com/abstract=2176832

Biresh K. Sahoo (Contact Author)

Xavier Institute of Management ( email )

Xavier Square
Bhubaneswar, 751 013
India
+91 674 6647 735 (Phone)

HOME PAGE: http://hib.xub.edu.in/Hibiscus/Pub/faccvDet.php?client=xu&facid=XF325

Kaoru Tone

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan

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