Abstract

The efficiency of the personnel involved in local government is considered to be critical for significant progress in global competition and development. This study adopted a super-efficiency Data Envelopment Analysis (DEA) model with undesirable outputs to evaluate the operating performance of Taiwan’s local governments. We also employed the concept of the Sharpe ratio to combine desirable and undesirable outputs and then, form modified outputs. The study revealed that, neglecting undesirable outputs would underestimate (on average) governments’ operating efficiency and cause incorrect efficiency rankings. Moreover, given specific real disposable income per capita, undesirable outputs regarding the volume of garbage clearance and air pollution are over-produced on average; however, unemployment rates are almost optimal. We therefore propose that, environmental protection policies are crucial for local governments to increase their performance and that the evaluated efficiency scores can be used by central governments as reference indices to subsidize local governments actively engaging in environmental protection based on the difference between the average output slack and each government’s output slack.

Key words: Undesirable outputs, super-efficiency, data envelopment analysis, Sharpe ratio.