This chapter points out serious shortcomings in DEA's treatment of price efficiency, illustrates the dangers of misspecification errors in DEA, and suggests extentions of the basic DEA formulation that address these shortcomings.

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Many decision-making units (DMUs) operate under site characteristics that differ significantly from those experienced by other DMUs and these differences may affect their efficiency rating. Often, these characteristics are beyond the control of a DMU and may involve environmental and demographic factors, such as topography, population density, and economic welfare. Comparing efficiency ratings absent appropriate attention to variations in these factors across DMUs is unfair. This paper presents a new procedure for removing the influence of site characteristics, which is a vital step in performing efficiency analysis when DMUs operate under significantly different conditions.