Measuring technical and allocative inefficiency in the translog cost system: a Bayesian approach

In this paper, we propose simulation-based Bayesian inference procedures in a cost system that includes the cost function and the cost share equations augmented to accommodate technical and allocative inefficiency. Markov chain Monte Carlo techniques are proposed and implemented for Bayesian inferences on costs of technical and allocative inefficiency, input price distortions and over- (under-) use of inputs. We show how to estimate a well-specified translog system (in which the error terms in the cost and cost share equations are internally consistent) in a random effects framework. The new methods are illustrated using panel data on U.S. commercial banks.     

Consistent estimation of technical and allocative efficiencies for a semiparametric stochastic cost frontier with shadow input prices

Conventional parametric stochastic cost frontier models are likely to suffer from biased inferences due to misspecification and the ignorance of allocative efficiency (AE). To fill up the gap in the literature, this article proposes a semiparametric stochastic cost frontier with shadow input prices that combines a parametric portion with a nonparametric portion and that allows for the presence of both technical efficiency (TE) and AE. The introduction of AE and the nonparametric function into the cost function complicates substantially the estimation procedure. We develop a new estimation procedure that leads to consistent estimators and valid TE and AE measures, which are proved by conducting Monte Carlo simulations.     

Estimating DEA technical and allocative inefficiency using aggregate cost or revenue data

In this paper, we address the question of Data Envelopment Analysis (DEA) evaluation of efficiency when aggregate cost or revenue data must be used. We show that the DEA technical inefficiency measure using total revenues as the single output variable or total costs as the single input variable equals the aggregate technical and allocative inefficiency. We employ this result to estimate allocative inefficiency and construct statistical tests of the null hypothesis of no allocative inefficiency analogous to those of the null hypothesis of no scale inefficiency. We illustrate our method using revenue and personnel data for the top U.S. public accounting firms over 1995–1998. Our empirical results indicate the existence of statistically significant allocative inefficiency in the public accounting industry.

Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers

Earlier papers by Aiger, Lovell and Schmidt and by Meeusen and van den Broeck have considered stochastic frontier production functions. this paper extends that work by considering the duality between stochastic frontier production and cost funstions, under the assumtions of exact cost minimization (tecchnical inefficiency only) and of inexact cost minimization (technical and allocative inefficiency). We show how to measure both types of inefficiency, and the associated cost of inefficiency. The techniques are illustrated using data on steam-electric generating plants.     

A note on the decomposition of cost efficiency into technical and allocative components

In this note a simpler method of cost efficiency decomposition than that of Kopp and Diewert (1982) is proposed. The method is obtained by application of a duality theorem for cost and distance functions.     

An examination of the cost efficiency of banks in Taiwan and China using the metafrontier cost function

Using the stochastic metafrontier framework of Battese et al. (J Prod Anal 21:91–103, 2004), this study proposes to compare and measure the cost efficiency and cost frontier gap between the banking industry in Taiwan and China. It further identifies environmental variables that determine bank’s cost frontier gap between two countries. Data on 69 sample banks for years 2005–2009 are used in the empirical analysis and inference. The empirical results show that Taiwanese banks have in general the superior cost frontier of production, but inferior cost efficiency of operation than Chinese banks. Private banks in Taiwan have the best cost frontier, whereas foreign banks in China are most cost efficient among all banks in Taiwan and China. The empirical results also reveal that the majority of Taiwanese banks are undersized and that most banks in China are oversized. Finally, the regression results show that the financial market structure, institutional environment, and political development are significant determinants of the cost gap between the cost frontiers of banks in Taiwan and China. Therefore, programs related to changes directed toward a better bank production environment can be initiated to improve the cost technologies of banks in both Taiwan and China.     

Measuring scale effects in the allocative profit efficiency

This paper provides an approach to the measurement of the “scale effects” in the allocative profit efficiency. To be specific, we evaluate the improvements of profit that can be accomplished by means of a change in the scale size, once technical efficiency is achieved. New decompositions of the allocative efficiency into a scale effect component and the corresponding residual mix effect component are derived.     

Pitfalls in the estimation of a cost function that ignores allocative inefficiency: A Monte Carlo analysis

In the stochastic frontier literature, it is a widely held view that allocative inefficiency can be lumped together with technical inefficiency in the estimation of cost frontiers. Therefore, a one-sided error term in the cost function is believed to capture the cost of overall (technical plus allocative) inefficiency. In this paper we challenge that view through a detailed Monte Carlo investigation. The results show that failure to include the cost of allocative inefficiency explicitly in the cost function biases the estimates of: (i) the cost function parameters, (ii) returns to scale, (iii) input price elasticities, and (iv) cost-inefficiency.     

Joint estimation of technical efficiency and production risk for multi-output banks under a panel data cost frontier model

This article generalizes production risk from a single output production function to a multiple output cost frontier, which is able to examine input-oriented technical efficiencies and production risk simultaneously in the context of a panel data. Furthermore, the joint confidence interval estimates for technical efficiencies are constructed by means of multiple comparisons with the best approach. Whether taking production risk into account or not offers quite dissimilar implications in terms of the average technical efficiency measure and the identification of multiple efficient banks achieving the optimal cost frontier. It is suggested that inferences drawn on the basis of the confidence intervals of technical efficiency provide much more fruitful and insightful information than the point estimation alone. Bank specific risk parameters are found to be highly and positively correlated with fixed-effect estimates, implying that the more risk-averse a bank is, the more technically efficient it will be.

Estimating substitution elasticities with the Fourier cost function: Some Monte Carlo results

The Fourier flexible form possesses desirable asymptotic properties that are not shared by other flexible forms such as the translog, generalized Leontief, and generalized Box-Cox. One of them is that an elasticity of substitution can be estimated with negligible bias in sufficiently large samples regardless of what the true form actually is, save that it be smooth enough. This article reports the results of an experiment designed to determine whether or not this property obtains in samples of the sizes customarily encountered in practice. A three-input, homothetic version of the generalized Box-Cox cost function was used to generate technologies that were oriented in a two-dimensional design space according to a central composite rotatable design; the two factors of the design were the Box-Cox parameter and a measure of the dispersion of the substitution matrix. The Fourier cost function was used to estimate the substitution elasticities at each design point, and the bias at each point was estimated using the Monte Carlo method. A response surface over the entire design space was fitted to these estimates. An examination of the surface reveals that the bias is small over the entire design space. Roughly speaking, the estimates of elasticities of substitution are unbiased to three significant digits using the Fourier flexible form no matter what the true technology. Our conclusion is that the small bias property of the Fourier form does obtain in samples of reasonable size; this claim must be tampered by the usual caveats associated with inductive inference.     

Inequality and reforms in transition countries

Distributional patterns evolved quite differently and stabilized at diversified levels across the Central–Eastern European and former Soviet Union countries which underwent transition. In this paper we provide an overview of income inequality dynamics for 22 transition countries from 1989 to 2008 and of the explanations and interpretations proposed by the main literature. We then highlight that while the effects of different transition approaches on output dynamics and other macroeconomic aggregates have been largely analysed, scarce attention has been devoted so far to their impact on distributive patterns. However, this kind of analysis might usefully contribute to complete the complex picture of the many social, economic and structural factors affected by transition and provide useful policy insights for those countries still experiencing deep institutional change.     

Estimating time series models using the relevant cost function

In many forecasting problems, the forecast cost function is used only in evaluating the forecasts; a second cost function is used in estimating the parameters in the model. In this paper, I explore some of the ways in which the forecast cost function can be used in estimating the parameters and, more generally, in producing the forecasts. I define the optimal forecast and note that it may depend on the entire conditional distribution of the data, which is typically unknown. I then consider three of the steps involved in forming the forecast: approximating the optimal forecast, selecting the model, and estimating any unknown parameters. The forecast cost function forms the basis of the approximation, selection, and estimation. The methods are illustrated using time series models applied to 15 US macroeconomic series and in a small Monte Carlo experiment.     

Cost and profit efficiency of conventional and Islamic banks in GCC countries

Using stochastic frontier approach, this paper investigates the cost and profit efficiency levels of 71 commercial banks in Gulf cooperation council countries over the period 1999–2007. This study also conducts a comparative analysis of the efficiency across countries and between conventional and Islamic banks. Moreover, we examine the bank-specific variables that may explain the sources of inefficiency. The empirical results indicate that banks in the Gulf region are relatively more efficient at generating profits than at controlling costs. We also find that in terms of both cost and profit efficiency levels, the conventional banks on average are more efficient than Islamic banks. Furthermore, we observe a positive correlation of cost and profit efficiency with bank capitalization and profitability, and a negative one with operation cost. Higher loan activity increases the profit efficiency of banks, but it has a negative impact on cost efficiency.     

Measuring the technical efficiency of cooperative societies in Kuwait

This study employs bootstrap data envelopment analysis to measure the technical efficiencies of 48 Kuwaiti retail cooperative societies (coops) during the years 2012–2015. Average profit efficiency falls substantially from 84% to 70% after applying a bootstrap correction. The bias is larger for coops originally identified as being on the efficient frontier. The average coop is too small, but both profitability and efficiency are negatively related to the number of direct branches (mini‐marts). Also, coops can increase profitability through greater equity capitalization, whereas better control of labor costs leads to higher profit efficiency.     

A test for the existence of allocative inefficiency in firms

This paper is concerned with the problem of testing for the presence of allocative inefficiency in firms for models in which the cost function is stochastic, the possibility of technical inefficiency is allowed, and the efficient input cost share equations are stochastic. The test exploits the relationships among the disturbances in the cost and share equations to derive implications of the existence of allocative inefficiency. This leads to the use of a Wald-type statistic to take account of the one-sided nature of the alternative. Some empirical experience is reported.     

Measuring the cost and incidence of employee benefits.

Demographic, social, and economic changes and employer cost-cutting efforts are combining to produce new, more flexible, more integrated benefits--which are more difficult to measure.     

Stock markets,banks and the sources of economic growth in low and high income countries

This paper studies the effects of stock markets and banks on the sources of economic growth, productivity and capital accumulation, using a large cross country panel that includes high- and low-income countries. Results show that, in low-income countries, banks have a sizable positive effect on capital accumulation. We find that stock markets, however, have not contributed to capital accumulation or productivity growth in these countries. Given the emphasis that has been placed in developing equity markets in developing countries, these findings are somewhat surprising. Conversely, in high-income countries, stock markets are found to have sizable positive effects on both productivity and capital growth, while banks only affect capital accumulation.     

Measuring technical and scale inefficiencies in the beer industry: Nonparametric and parametric evidence

Two alternative approaches of efficiency measurement, nonparametric and statistical, are employed to calculate three types of efficiency indexes for the U.S. beer industry over the period 1950–1986. The results indicate that the beer industry was operating at a high level of pure technical efficiency over that period. The mean value of this efficiency measure is 93.7 percent based on the nonparametric approach and 87.5 percent based on the statistical approach. The two approaches yield dissimilar values and sources for overall technical inefficiency. The overall technical efficiency index computed under the nonparametric approach stands at 91.10 percent and the observed inefficiency is found to be more due to pure technical inefficiency than to scale inefficiency. Using the statistical approach, the beer industry is found to be less overall technically efficient (68.42 percent) than indicated by the nonparametric methodology and the observed inefficiency is found to be primarily contributed to by scale inefficiency.     

Topics in macro-modelling of East European countries in the period of transition

Central and European former Centrally Planned Economies (CPEs) entered a period of transition towards market economies. The evolution is marked by a transition from shortage- to demand-determined economies, associated with the abandonment of price control and the introduction of tight wage control. Stabilization programmes (in Poland from 1990), implementing tough deflationary fiscal and monetary policies, brought about the suppression of hyperinflation. The high adjustment costs — deep recession, high rates of unemployment — are characteristics of the early '90s. The deregulation of the public sector and the building of the private one commenced, and will be a long-lasting process.To meet the changes in economic regimes and mechanisms, the existing models had to be adequately respecified and new models constructed. The large W-5 macromodel for Poland, which covers the final and intermediate demands, had to be extended to introduce the market adjustment mechanisms and, more broadly, the financial flows. To meet the needs of short-term financial policies, new quarterly models had to be built, as, for instance, the WK macromodel for the Polish economy. The paper discusses the major problems of the models' specification under the data constraints.