Hicks-Moorsteen versus Malmquist: a connection by means of a radial productivity index

A primal index of productivity change is introduced which decomposes exactly into three components: technical change, technical efficiency change and average scale economies (radial scale change). The productivity index is defined using variations of the distance function along pre-assigned input–output rays and, for this reason, it is deemed a radial productivity index (RPI). It is proven that: first, the RPI index collapses to the Malmquist productivity index when the technology is constant returns to scale (CRS); second the RPI index equals the Hicks-Moorsteen productivity index under homotheticity of technology (and non-CRS). The key to these results is a new definition and measure of the contribution of scale economies to productivity change.     

Efficiency, productivity, and scale economies in the U.S. property-liability insurance industry

The paper examines efficiency, productivity and scale economies in the U.S. property-liability insurance industry. Productivity change is analyzed using Malmquist indices, and efficiency is estimated using data envelopment analysis. The results indicate that the majority of firms below median size in the industry are operating with increasing returns to scale, and the majority of firms above median size are operating with decreasing returns to scale. However, a significant number of firms in each size decile have achieved constant returns to scale. Over the sample period, the industry experienced significant gains in total factor productivity, and there is an upward trend in scale and allocative efficiency. More diversified firms and insurance groups were more likely to achieve efficiency and productivity gains. Higher technology investment is positively related to efficiency and productivity improvements.     

The Productivity Effects of Internal and External R&D: Evidence from a Dynamic Panel Data Model*

We examine the impact of internal and external R&D on labour productivity in a 6‐year panel of Dutch manufacturing firms. We apply a dynamic panel data model that allows for decreasing or increasing returns to scale in internal and external R&D and for economies of scope. We find complementarity between internal and external R&D, with a positive impact of external R&D only evident in case of sufficient internal R&D. These findings confirm the role of internal R&D in enhancing absorptive capacity. The scope economies are accompanied by decreasing returns to scale at high levels of internal and external R&D. The analysis indicates that productivity grows by increasing the share of external R&D in total R&D.     

Productivity, returns to scale and product differentiation in the retail trade industry: an empirical analysis using Japanese firm-level data

This paper examines productivity and returns to scale under the assumption of monopolistic competition using Japanese firm-level data. Although differentiating products (services) is considered important in firms?? strategies and productivity growth, it has not been sufficiently investigated in previous studies. In this paper, we study this issue in two retail trade industries, department stores and supermarkets, applying the model of Melitz (2000). Our results indicate that the standard production function is not relevant to estimate productivity in imperfectly competitive markets. It also suggests that the market structure should be carefully considered in productivity analysis. In addition, product differentiation has a positive effect on firms?? revenue for the supermarkets. Furthermore, the retail trade industries possibly follow increasing returns to scale. Thus, policy measures that promote economies of scale and product differentiation should contribute to further growth in these industries. In addition, the results indicate that the regulatory reform of the retail trade industry in 2000 increased the gap between winners and losers in terms of productivity.     

Implementation of marginal cost pricing equilibrium allocations with transfers in economies with increasing returns to scale

This paper considers implementation of marginal cost pricing equilibrium allocations with transfers for production economies with increasing returns to scale. We present a mechanism whose Nash equilibrium allocations coincide with the set of marginal cost pricing equilibrium allocations with transfers that characterizes Pareto efficient allocations for economies with non-convex production technologies. We allow production sets and preferences to be unknown to the planner. The mechanism has some nice properties such as feasibility, continuity, and finite-dimension of message space. Furthermore, it works not only for three or more agents, but also for two-agent economies.     

Productivity differences in multiple output industries: An empirical application to electricity distribution

Given that electricity distribution is undertaken via a network, it is expected that costs of production are affected both by the nature of the network and the volume of physical output distributed via the network. This two-dimensional concept of firm size, that is involving network size (number of customers) and the level of physical output (kWh), also corresponds to the distinction between productivity measures of returns to density and returns to scale.This approach has been used to specify a restricted multioutput cost function and to estimate this function for the Norwegian electricity distribution industry through the use of a flexible functional form (translog). The results indicate that no economies of scale are present in the industry even for small plants when measured correctly, but that economics of density are present.     

Estimating the Production Efficiency of US Foreign Direct Investment

This paper empirically estimates the efficiency of outward US foreign direct investment (FDI) within the framework of economies of scale, which is hypothesized as a main goal of ‘efficiency‐seeking’ multinationals. By using data for the period 1982–2007 and a nonhomogeneous production, the estimates of efficiency indicate an improvement in efficiency from decreasing to increasing returns to scale. The increasing productivity of both capital and labor is a contributory factor. Evidence of increasing elasticity of factor substitution attests to management use of a flexible production technology that enables efficient resource allocation. The results lend support to the ‘efficiency‐seeking’ hypothesis of FDI. Copyright © 2012 John Wiley & Sons, Ltd.     

Returns to scope: a metric for production synergies demonstrated for hospital production

Knowledge of the production function’s scope properties can provide insights for firms choosing their operating strategy, policy-makers considering industry structure, and analysts determining appropriate tools. We introduce a new property, returns to scope, which is distinct from scale properties and does not rely on price information. Based on desirable characteristics of an estimator of returns to scope, we propose two methods for assessment. We present examples using simulated data and hospital production data from the 2008 National Inpatient Sample of the Agency for Healthcare Research and Quality’s Healthcare Cost and Utilization Project. We find that hospitals experience negative returns to scope (productivity losses) from the joint production of minor and major diagnostic procedures. Based upon our results we conclude that the new returns to scope property allows sharper insights than classic economies of scope approaches.     

A multiproduct Symmetric Generalized McFadden cost function

This paper introduces a flexible multiproduct cost function that permits zero values of one or more of the outputs and can impose restrictions quite easily, if not automatically satisfied, to ensure global concavity property. It satisfies linear homogeneity (in prices) property and is flexible in the output space. Thus the function is ideal for estimating, for example, economies of scope, cost complementarity, product-specific returns to scale, etc., without worrying about zero values of output(s) and extrapolations to points far from the point of approximation. As an empirical application, we use panel data (1978–1985) on 12 Finnish foundry plants to estimate technical progress, overall returns to scale, product-specific returns to scale and economies of scope.     

Accumulation, Technical Progress, and Increasing Returns in the Economic Growth of East Asia

Adopting homothetic variable returns to scale functional specifications, this study identifies the returns to scale in the aggregate production functions of four East Asian newly industrialized economies–Hong Kong, Korea, Singapore, and Taiwan–and the Group of Five economies based on a maximum likelihood estimation. The study finds evidence of increasing returns in the early developmental stage of the East Asian economies. Separating out the scale contribution from the non-scale factor contributions, the decomposition of the sources of East Asian economic growth differs significantly from the conventional constant returns to scale results, indicating that the role of technical progress is overestimated when constant returns to scale is assumed.     

Imperfect Competition and Total Factor Productivity Growth

This article examines the role of imperfect competition in determining total factor productivity growth (TFPG) by bringing together a New Empirical Industrial Organization (NEIO) model and the TFPG model of Good, Nadiri and Sickles (1999). Application of the integrated model to 1973–1992 data from 29 food processing industries revealed that, overall, changes in markups, economies of scale, and demand growth contributed positively to TFPG while the disembodied technical change was a negative contributor. Furthermore, the factors underlying the TFPG estimates are interactive and their net effects are starkly different from the conventional Solow (1957) residual TFPG measures, underscoring the need to account for imperfect competition, returns to scale, and demand growth in analyses of this type.     

Economic efficiency of multi-product structure: the evidence from Korean housebuilding firms

The Korean housebuilding industry has been subject to structural changes since the 1980s. One of the key features is that housebuilding firms have become diversified into a range of businesses and as a result display multi-product structure. This paper examines the efficiency of the multi-product structure of Korean housebuilding firms. For the analysis, translog cost functions were estimated using data for 201 building firms for the 3 years 1993–1995. The empirical results indicate that medium-size building firms enjoy increasing returns to scale, whereas large firms experience constant returns to scale. Korean building firms exhibit significant economies of scope in their diversification activities. Large firms have the greatest economies of scope. These results are consistent with cost efficiency for the multi-product structure of Korean housebuilding firms. The estimated optimum scale suggests that many large firms should expand only through diversification.     

Big and beautiful? On non-parametrically measuring scale economies in non-convex technologies

Knowledge on the scale economies drives the incentives of regulators, governments and individual utilities to scale-up or scale-down the scale of operations. This paper considers the returns to scale (RTS) in non-convex frontier models. In particular, we evaluate RTS assumptions in a Free Disposal Hull model, which accounts for uncertainty and heterogeneity in the sample. Additionally, we provide a three-step framework to empirically analyze the existence and extent of RTS in real world applications. In a first step, the presence of scale (and scope) economies is verified. Secondly, RTS for individual observations are examined while in a third step we derive the optimal scale for a sector as a whole. The framework is applied to the Portuguese drinking water sector where we find the optimal scale to be situated around 7–10 million m³.     

Efficiency and Global Scale Characteristics on the “No Free Lunch” Assumption Only

In a production technology, the type of returns to scale (RTS) associated with an efficient decision making unit (DMU) is indicative of the direction of marginal rescaling that the DMU should undertake in order to improve its productivity. In this paper a concept of global returns to scale (GRS) is developed as an indicator of the direction in which the most productive scale size (MPSS) of an efficient DMU is achieved. The GRS classes are useful in assisting strategic decisions like those involving mergers of units or splitting into smaller firms. The two characterisations, RTS and GRS, are the same in a convex technology but generally different in a non-convex one. It is shown that, in a non-convex technology, the well-known method of testing RTS proposed by Färe et al. is in fact testing for GRS and not RTS. Further, while there are three types of RTS: constant, decreasing and increasing (CRS, DRS and IRS, respectively), the classification according to GRS includes the fourth type of sub-constant GRS, which describes a DMU able to achieve its MPSS by both reducing and increasing the scale of operations. The notion of GRS is applicable to a wide range of technologies, including the free disposal hull (FDH) and all polyhedral technologies used in data envelopment analysis (DEA).     

Testing for predictability in equity returns for European transition markets

This paper presents empirical evidence of short and long-run predictability in stock returns for European transition economies. We employ variance ratios with a bootstrap methodology to test for short-run predictability, which is present in most countries. We also estimate Hurst exponents to test for long-range dependence, and find evidence of such. Furthermore, we find evidence of strong time-varying long-range dependence in these economies stock returns, which is in line with evidence of multifractality of equity returns.     

The evolution of scale economies in US banking

Continued consolidation of the US banking industry and a general increase in the size of banks have prompted some policymakers to consider policies that discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. This paper presents new estimates of returns to scale for US banks based on nonparametric, local‐linear estimation of bank cost, revenue, and profit functions. We report estimates for both 2006 and 2015 to compare returns to scale some 7 years after the financial crisis and 5 years after enactment of the Dodd–Frank Act with returns to scale before the crisis. We find that a high percentage of banks faced increasing returns to scale in cost in both years, including most of the 10 largest bank holding companies. Also, while returns to scale in revenue and profit vary more across banks, we find evidence that the largest four banks operate under increasing returns to scale.     

Optimal agglomerations in dynamic economics

We study rational expectations equilibrium problems and social optimum problems in infinite horizon spatial economies in the context of a Ramsey type capital accumulation problem with geographical spillovers. We identify sufficient local and global conditions for the emergence (or not) of optimal agglomeration, using techniques from monotone operator theory and spectral theory in infinite dimensional Hilbert spaces. We show that agglomerations may emerge, with any type of returns to scale (increasing or decreasing) and with the marginal productivity of private capital increasing or decreasing with respect to the spatial externality. This is a fairly general result indicating the importance of the network structure of the spatial externality relative to the properties of the aggregate production function. Our analytical methods can be used to systematically study optimal potential agglomeration and clustering in dynamic economics.     

FLEXIBLE COST FUNCTION ESTIMATES FOR A GAS AND FUEL CORPORATION IN AUSTRALIA

This paper reviews and empirically tests the available evidence concerning economies of scale and technological change at Australian Gas Limited of New South Wales (AGL). a gas and fuel corporation. Since energy corporations are considered to need scale economies, they are regulated 'n both developed and developing countries. In keeping with the trend of deregulation stemming from the beginning of the 1980s in Western countries, many kinds of public corporations have been privatized and deregulated. Energy corporations are not an exceptional case, but very little evidence on this industry has been reported so far. From empirical tests, it is shown in a trans-log-type cost function that AGL has scale economies. the degree of which increased after the corporation changed its energy source from coal oil to liquid natural gas. Moreover, from the results of the trans-log cost function including technological change, a Hicksian neutral type technical progress exists. In a Hicksian non-neutral type, stock-intensive technical progress exists. while labor productivity deterioates. Energy productivity is not significant.     

Returns to Scale on Nonparametric Deterministic Technologies: Simplifying Goodness-of-Fit Methods Using Operations on Technologies

Thepurpose of this short article is to simplify goodness-of-fitmethods to obtain qualitative information about returns to scalefor individual observations. Traditional and new goodness-of-fitmethods developed for estimating returns to scale on nonparametricdeterministic reference technologies are reviewed. Using compositionrules for technologies with specific returns to scale assumptions,we show how these goodness-of-fit methods can be simplified inthe case of convex technologies (Data Envelopment Analysis (DEA)models).