Stochastic productivity measurement

Stochastic productivity indicators are defined, and superlative measures of these indicators are derived. It is shown that, in the presence of complete markets or a common-expectations equilibrium, differences in the market values of firms are superlative indicators of cross-sectional productivity differences. Exactness results are used to decompose nonstochastic productivity indicators into a measure of true productivity change and a measure of ‘luck’. The decomposition is illustrated empirically.

The productivity performance of Irish dairy farms 1984–2000: a multiple output distance function approach

This study measures productivity growth on Irish dairy farms over the period 1984–2000. A total factor productivity index is constructed for the dairy system and is decomposed into technical change, efficiency change, and changes in scale efficiency. This is achieved by estimating a stochastic output distance function model of the production technology in use on Irish dairy farms. Overall, productivity on Irish dairy farms grew by 1.2% per annum over the sample period.

Efficiency vectors, efficiency and performance measures: new methods for ranking efficient organizational units

We present and discuss measures for analyzing productivity in deterministic frontier models. A new efficiency measure is introduced allowing for discrimination among efficient organizational units. In addition, a new performance measure for analyzing productivity of organizational units is presented. This measure fulfills various properties of efficiency measures but relaxes the indicator property. Both new approaches are based on the development of efficiency vectors which is a new vector measure for measuring efficiency. The vector components are efficiency measures related to subsets of a production possibility set. The new approaches are applied in the context of data envelopment analysis.

Accounting for growth in retail trade: an international productivity comparison

In this paper we argue that the standard approach for measuring output and productivity in the trade sector has become obsolete. The key problem is that changes in prices of goods purchased for resale are not accounted for. We outline a consistent accounting framework for measuring trade productivity and provide new estimates, taking into account purchase prices of goods sold in a double deflation procedure. We find strong productivity improvements in the UK and US compared to France, Germany and The Netherlands since the mid-1990s. This finding is robust for various productivity measurement models.

U.S. productivity in agriculture and R&D

This paper examines the impact of R&D on multifactor productivity in the U.S. agricultural sector over the 1910–1990 period. We use the Bennet–Bowley indicator to measure agricultural productivity based on a multiple output-multiple input technology. We demonstrate the relationship between the price dependent Bennet–Bowley indicator and the Luenberger productivity indicator which is constructed from directional distance functions without requiring price information. These performance measures are dual to the profit function which arguably makes them especially useful in the agricultural setting. We employ time-series techniques to investigate the effect of R&D on the pattern of productivity growth. We find that we cannot reject the presence of a cointegrating relationship between the two series and that productivity growth in the U.S. agriculture responds positively to R&D expenditure with a lag of between four and ten periods.

Debreu’s coefficient of resource utilization, the Solow residual, and TFP: the connection by Leontief preferences

Debreu’s coefficient of resource utilization is freed from individual data requirements. The procedure is shown to be equivalent to the imposition of Leontief preferences. The rate of growth of the modified Debreu coefficient and the Solow residual are shown to add up to TFP growth. This decomposition is the neoclassical counterpart to the frontier analytic decomposition of productivity growth into technical change and efficiency change. The terms can now be broken down by sector as well as by factor input.

Bridging the barriers: knowledge connections,productivity and capital accumulation

The paper contributes to the explanation of the large differences in cross-country productivity performance by modelling and testing the effects of social barriers to communication on productivity and capital accumulation. In an optimal growth model, social barriers to communication, which impede the formation of knowledge connections, are shown to reduce both transitory and steady-state levels of total factor productivity (TFP), per capita consumption and reproducible capital. Empirical testing yields a robust and theoretically consistent result: linguistic barriers to communication reduce productivity and capital accumulation. The findings provide an explanation for cross-country differences in TFP, and fresh insights into how productivity ‘catch up’ may be initiated.

The contributions of productivity, price changes and firm size to profitability

Sources of profit change for Telstra, Australia’s largest telecommunications firm, are examined. A new method allows for changes, in a firm’s profits to be broken down into separate effects due to productivity change, price changes, and growth in the firm’s size. This in turn allows us to calculate the distribution of the benefits of productivity improvements between consumers, labor, and shareholders. The results show that around half the benefits from Telstra’s productivity improvements from 1984 to 1994 were passed on to consumers in the form of real price reductions.

Exact decomposition of the Fisher ideal total factor productivity index

Decompositions of total factor productivity (TFP) shed light on the driving factors behind productivity change. We develop the first exact decomposition of the Fisher ideal TFP index which contains no debatable mixed-period components or residuals. We systematically isolate five effects of (1) technical change, (2) technical efficiency, (3) scale efficiency, (4) allocative efficiency, and (5) price effect. The three efficiency components (2–4) represent the efficiency of achieving a given target point. Components (1) and (5) capture the changes of the target point. While the technical change component is well-established, changes in the relative input–output prices can have real effects on the scale and scope of the target. Such changes are captured by the new price effect component (5). The new decomposition is compared with existing decompositions both in theory and by means of an empirical application to a panel data of 459 Finnish farms in years 1992–2000.

Efficiency measurements and the gains from trade under transaction costs

The paper investigates the measurement of economic efficiency under transaction costs in a second best world. New measurements of technical efficiency, allocative efficiency, and price efficiency are proposed. They have three desirable properties. First, they measure efficiency loss in monetary units. Second, they are additive and can be conveniently summed into an overall efficiency measure. Third, they allow for transaction costs and their effects on prices and trade incentives. The paper investigates the welfare effects of technology choice, government pricing and trade policy, and market imperfections on efficiency. It provides new insights on the measurement of benefits from trade liberalization when trade affects not only price efficiency, but also technical and allocative efficiency.

Structural changes,market growth and productivity gains of the US real estate investment trusts in the 1990s

The 1990s were tumultuous times for the US Real Estate Investment Trusts (REITs) industry. Significant structural changes occurred during the decade, especially after the 1993 Revenue Reconciliation Act, which tremendously boosted the flow of funds into the system by allowing the participation of institutional investors in REITs. As a result, the industry experienced remarkable asset growth during the decade, with a large number of initial public offerings and substantial increases in market capitalization. Employing the Data Envelopment Analysis-type Malmquist index approach, this paper explores the impact of such environmental changes on productivity growth, efficiency change, and technological progress of REITs. Our results indicate that while efficiency of the REITs significantly increased, their average productivity declined and technology regressed during this decade. It appears that the typical REIT has failed to improve technically, but exerted substantial effort to catch up with the best practice ones relying mainly on aggressive growth strategies. However, our empirical results indicate that they might have overextended themselves as most began to suffer from diseconomies of scale.

Output and productivity growth in the education sector: comparisons for the US and UK

This paper considers the measurement of performance in public service provision in an international context by examining outcome-based measures for the education sector. It first sets out the measurement issues in general terms. The paper then applies these methods to comparing the UK experience with that in the US over the period 1979–2002. The results show higher labour productivity growth in the UK education sector than in the US over this time period, so that the UK eliminated the productivity gap with the US by the end of the Century.

Far out or alone in the crowd: a taxonomy of peers in DEA

A method is presented for classifying strongly efficient units in DEA as interior or exterior, and as self-evaluators or active peers. The exterior strongly efficient units are found by running the enveloping procedure “from below”. There is no firm production-function evidence of the efficiency of exterior self-evaluators. Interior self-evaluators are more likely to have active peers as neighbours in more directions and may therefore represent technology. When performing a second stage regression analysis of efficiency scores, exterior self-evaluators should be removed. The proportion of exterior active peers also provides information on whether the variable specification is supported by the data.

The dynamics of efficiency and productivity growth in U.S. electric utilities

This study recognizes explicitly the efficiency gain or loss as a source in explaining the growth. A theoretically consistent method to estimate the decomposition of dynamic total factor productivity growth (TFP) in the presence of inefficiency is developed which is constructed from an extension of the dynamic TFP growth, adjusted for deviations from the long-run equilibrium within an adjustment-cost framework. The empirical case study is to U.S. electric utilities, which provides a measure to evaluate how different electric utilities participate in the deregulation of electricity generation. TFP grew by 2.26% per annum with growth attributed to the combined scale effects of 0.34%, the combined efficiency effects of 0.69%, and the technical change effect of 1.22%. The dynamic TFP grew by 1.66% per annum for electric utilities located within states with the deregulation plan and 3.30% per annum for those located outside. Electric utilities located within states with the deregulation plan increased the outputs by improving technical and input allocative efficiencies more than those located outside of states with deregulation plans.

Externalities, efficiency, regulation, and productivity growth in the U.S. electric utility industry

This paper examines the decomposition of total factor productivity growth for firms subject to regulation, given the production of a bad output. The production of good and bad outputs provides benefits and costs to society. Corporate socially responsible firms recognize the cost to society of producing the bad output. The paper separates the production technology and regulation effects from both the scale and technical change components. The paper also examines the measurement and decomposition of productivity growth when not accounting for production of the bad output. Using a 1992–2000 panel of 34 U.S. investor-owned electric utilities, results indicate that improvements in the scale, efficiency change, and technical change components contributed to positive growth. Not accounting for production of the bad output led to, on average, an overestimation of both the rate of productivity growth, and the contributions of scale economies and technical change to changes in productivity growth.

The efficiency of Spanish arable crop organic farms,a local maximum likelihood approach

The methodologies that have been used in existing research to assess the efficiency with which organic farms are operating are generally based either on the stochastic frontier methodology or on a deterministic non-parametric approach. Recently, Kumbhakar et al. (J Econom 137:1–27, 2007) proposed a new nonparametric, stochastic method based on the local maximum likelihood principle. We use this methodology to compare the efficiency ratings of organic and conventional arable crop farms in the Spanish region of Andalucía. Nonparametrically encompassing the stochastic frontier model is especially useful when comparing the performance of two groups that are likely to be characterized by different production technologies.

The impacts of education spending and finance reform on manufacturing property shadow values: a cost function approach

The effects of court-ordered education finance reform on property values and residential choice have received increasing attention in recent years (Fischel 2001). However, little attention has been focused on the effects of education finance reform on manufacturing sector property values within an optimizing framework. This is pursued here by modeling education expenditures and education finance reform as “free” variables to manufacturing firms in a cost function model together with input demand equations. This framework is applied to panel data on manufacturers’ capital (building and structures) stocks for the 48 continental US for 1982–1996 to estimate implicit (shadow) values to the manufacturing sector of education spending and school finance reform. On average, school finance reform lowers the implicit value of manufacturing firms’ stock of buildings and structures capital, while greater education spending lowers manufacturing variable costs.

Application of a double bootstrap to investigation of determinants of technical efficiency of farms in Central Europe

The paper provides one of the first applications of the double bootstrap procedure (Simar and Wilson 2007) in a two-stage estimation of the effect of environmental variables on non-parametric estimates of technical efficiency. This procedure enables consistent inference within models explaining efficiency scores, while simultaneously producing standard errors and confidence intervals for these efficiency scores. The application is to 88 livestock and 256 crop farms in the Czech Republic, split into individual and corporate.

Opening the black box: Finding the source of cost inefficiency

Parametric and nonparametric procedures are used to identify the apparent source of cost inefficiency in banking. Inefficiencies of 20–25% from earlier studies are reduced to 1–5% when, in addition to commonly specified cost function influences, variables reflecting banks’ external business environment and industry indicators of “productivity” are added. These productivity indicators explain most of the reduction in bank operating cost over 1992–2001 and was 5 times the reduction in the dispersion of inefficiency. Inefficiency appears stable over time because it is small relative to industry-wide cost changes occurring concurrently and because technology dispersion is imperfect.

Environmental regulation and productivity: testing the porter hypothesis

Abstract  This paper provides an empirical analysis of the relationship between the stringency of environmental regulation and total factor productivity (TFP) growth in the Quebec manufacturing sector. This allows us to investigate more fully the Porter hypothesis in three directions. First, the dynamic aspect of the hypothesis is captured through the use of lagged regulatory variables. Second, we argue that the hypothesis is more relevant for more polluting sectors. Third, we argue that the hypothesis is more relevant for sectors which are more exposed to international competition. Our empirical results suggest that: (1) the contemporaneous impact of environmental regulation on productivity is negative; (2) the opposite result is observed with lagged regulatory variables, which is consistent with Michel Porter’s conjecture; and (3) this effect is stronger in a subgroup of industries which are more exposed to international competition.