Causes of inefficiency in Japanese railways: Application of DEA for managers and policymakers

Although railway services have been suffering financially due to modal shifts and aging populations, they have been, and will continue to be, an essential component of nations' basic social infrastructures. Since railway firms generate positive externalities, and are required to operate in pre-determined licensed areas, governmental intervention/support may, in some cases, be justified. Indeed, many types of subsidies are created and offered for railway operations in Japan; while some are meant to cover large investments, others are used as compensation for regional disparities. However, thus far, no attempt has been made to analyze the reasons for the underperformance of Japanese railway services. In other words, it is unclear whether this underperformance can be attributed to exogenous and uncontrollable causes, or endogenous phenomena and, hence, capable of being handled by managers. The optimal degree of intervention is thus not sufficiently known. In the current paper, we propose a method based on data envelopment analysis (DEA) to analyze the causes of inefficiency in Japanese railway operations, and, further, to calculate optimal subsidy levels. The latter are designed to compensate for railways' lack of complete discretion in changing location of their operations and/or increasing/decreasing these operations since they are a regulated service. Our proposed method was applied to 53 Japanese railway operators. In so doing, we identified several key characteristics related to their inefficiencies, and developed optimal subsidies designed to improve performance.