Measurement of technical and allocative efficiencies using a CES cost frontier: a benchmarking study of Japanese transmission-distribution electricity

This paper estimates the technical and allocative inefficiencies of the transmission-distribution sector of Japanese electric utilities using a panel data during the 1981–1998 period. A stochastic production frontier of the CES form is jointly estimated with input demand equations. Taking advantage of the self-duality, we retrieve the cost frontier by which the impacts of technical and allocative inefficiencies on costs and input demands are measured. The estimated elasticity of substitution is significantly different from unity in favor of the CES specification over the Cobb–Douglas. The results show that observed costs are 9 to 48% higher than the efficient level; technical inefficiency raises costs by 1 to 28%, while allocative inefficiency does so by 8 to 30%. Although their impacts on costs are similar, technical inefficiency more fluctuates so the differences in the performance of utilities are mainly due to technical inefficiency. We also find a substantial over-utilization of capital for all utilities.

Firm exit and technical inefficiency

The purpose of the paper is to examine formally the fundamental implication that technical inefficiency (TI) is related to firm exit. Traditional stochastic frontier models allow for the measurement of TI but do not allow for a direct effect of TI on exit. We propose a model which allows for such effects and consists of a stochastic frontier model, and an additional equation that describes the probability of exit as a function of covariates and TI. Since TI is unobserved, econometric complications arise, and obtaining consistent estimates is non-trivial due to the presence of integrals in the likelihood function. We propose and implement maximum likelihood estimation one step, employing data for 3,404 manufacturing firms in Greece. We find significant positive effects from TI on the probability of exit. We also propose and provide measures of TI that respect the fact that unobserved TI affects the probability of exit and compare them to TI measures from the traditional stochastic frontier model.

Efficiency and Equity in School Funding: A Case Study for Kansas

This study measures cost inefficiency of Kansas public school districts and applied both mathematical programming and stochastic frontier approach. The empirical study uses two-stage data envelopment analysis model and the cost inefficiency effects model proposed by Battese and Coelli (Empirical Economics 24:325–332, 1995) and applied to a panel data. The results found mean inefficiencies from these two models are very close. The results indicate that Kansas school districts, on average, exhibit cost inefficiency in their operations, however, there is a tendency for inefficiencies to decline over time. The study does not find any strong evidence for lower efficiency due to lower expenditure per-pupil. Instead, we found inconclusive evidences where lower efficiency for certain school districts could be assigned to unfavorable environmental cost conditions.

Openness and the Efficiency of FDI: A Panel Stochastic Production Frontier Study

This paper uses a stochastic translog production frontier to estimate technical inefficiency indices whose conditional mean is specified as a function of FDI and its interaction with openness of the economy. The model is estimated using an annual panel of 46 countries for the years, 1981–2001. The results suggest that increased FDI increases potential output in both developed and developing countries with the effect being more profound in the former. It is also found that increased FDI reduces technical inefficiencies the more open is the economy but that this effect holds only for developed economies. Thus qualified support is found for the “Bhagwati hypothesis” as the results reveal that the efficiency–enhancing effect of FDI depends not only on openness but also on the degree of development of the host country.

Testing efficiency of the ruble-sterling foreign-exchange market under the gold standard

This paper tests an efficient market hypothesis for the Russian ruble–UK sterling exchange rates in the gold standard period 1897–1913. Using Bayesian Markov Chain Monte Carlo methods it is shown how to test a weak-form market efficiency in a doubly truncated regression model with ARMA-GARCH error. The suggested model accounts for time series characteristics of the data and bounds of exchange rates caused by the gold points and government intervention. We find that the weak-form efficiency hypothesis can not be rejected for the gold standard ruble exchange rates in both St.Petersburg and London markets.

Did efficiency of Indian public sector banks converge with banking reforms?

This paper examines the issue of convergence of efficiency levels among Indian public sector banks (PSBs) during the post-reforms period spanning from 1992/1993 to 2005/2006. The empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years. Further, the inefficient PSBs have been noted to be catching up with the efficient ones. That is, the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. In sum, the study confirms a presence of convergence phenomenon in the Indian public sector banking industry.

The sector bias of skill-biased technical change and the rising skill premium in transition economies

We test the hypothesis that the sector bias of skill biased technical change is important in explaining the rising relative wage of skilled workers in the manufacturing sector in three Central and Eastern European transition countries. The econometric results broadly confirm that the concentration of skill biased technical change in the skill intensive sectors had a significant effect on the skill premium in these transition countries.

Team production with inequity-averse agents

This paper analyzes the efficiency of team production when risk-neutral agents exhibit other-regarding preferences. It is shown that full efficiency can be sustained as an equilibrium of a budget-balancing mechanism that punishes some randomly chosen agents if output falls short of the efficient level but distributes output equally otherwise. The result depends on agents being sufficiently inequity-averse.

The contributions of technical and allocative efficiency to the economic performance of European railways

This paper provides an empirical analysis of the relative contributions of allocative and technical efficiency to the productivity performance of European railways over the period 1972 to 1999. A stochastic frontier approach is used to analyse the cost structure of the railway industry. We estimate a translog cost system in which allocative inefficiency is modelled through an exact relationship between the cost share equations and the cost function. To allow the estimation of such a model using the sample theory approach we assume that the share equation residuals represent deviations from first-order conditions and, therefore, that they represent exclusively allocative inefficiencies. The use of this simplifying assumption renders our analysis computationally tractable, but it could be inconsistent with the economic theory of duality and for that reason caution is required in interpretation of results. Acknowledging this caveat, we find that European railways have experienced significant cost increases due to inefficient behaviour, with a mean value of around 15%. In contrast to previous studies, however, our estimates indicate a larger role for allocative inefficiency, which accounts for around of a half of the total increase in cost inefficiency.

Specification and estimation of nonstandard profit functions

This paper critically examines appropriateness of the nonstandard profit function (NSPF) as a tool for measuring profit efficiency. We show that there are some fundamental problems with the NSPF approach, the way it is currently specified and estimated. This is true irrespective of whether technical inefficiency is included or not. Instead of estimating profit efficiency directly from the NSPF, we suggest alternative specifications and recommend using the cost function approach and deriving profit efficiency therefrom. Data from US banks are used to estimate the cost function and the NSPF. Results from alternative specifications are then compared and analyzed.

Money, Income and Inflation in Equilibrium – The Case of Greece

The specification of the linear long-run relationship among money, income and the opportunity cost of holding money has been a popular study in economic literature. In the specific case of Greece, numerous articles investigated this relationship using quarterly data, mainly of the period after 1960. The objective of this article is to investigate the same long-run relationship using annual data and covering the historical period between 1858 and 1938. The results of the used cointegration analysis are presented along with the findings of other authors who covered the post war era of the Greek Economy.

Exploring the relationship between technical and service characteristics

The paper explores the complex relationship between technical and service characteristics discussed by the Saviotti–Metcalfe model of innovation. It is proposed that principal components analysis (PCA) is a more appropriate method of analysing this relationship than approaches previously used. A PCA is performed on a dataset of mobile phone handsets for the period 2003 to 2008. In addition to the relationship between technical and service characteristics, the analysis explores the existence of clusters of ergonomic characteristics within mobile phone handsets. The findings indicate that a limited set of core technology components underpin the large set of service characteristics offered by mobile phone handsets, and that the mapping between technical and service characteristics can be highly complex.

Localized innovation, localized diffusion and the environment: an analysis of reductions of CO2 emissions by passenger cars

We investigate technological change with regard to CO₂ emissions by passenger cars, using a Free Disposal Hull methodology to estimate technological frontiers. We have a sample of cars available in the UK market in the period 2000–2007. Our results show that the rates of technological change (frontier movement) and diffusion (distance to frontier at the car brand level) differ substantially between segments of the car market. We conclude that successful policies should be aimed at the diffusion of best-practice technology, and take account of the different potential for further progress between different segments of the market (e.g. diesel vs. gasoline engines and small vs. large engines).

Transaction tax and stock market behavior: evidence from an emerging market

This study examines the impact of a stamp tax rate increase on market behavior, using data from two stock exchanges in China. We find that when the tax rate increases from 0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp tax of −50% and an elasticity of turnover with respect to transaction cost of −100%. The markets’ volatility significantly increases after the increase in the tax rate. Furthermore, the change in the volatility structure indicates that the markets become less efficient in the sense that shocks are less quickly assimilated in the markets.

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A new approach to bad news effects on volatility: the multiple-sign-volume sensitive regime EGARCH model (MSV-EGARCH)

In this paper, using daily data for six major international stock market indexes and a modified EGARCH specification, the links between stock market returns, volatility and trading volume are investigated in a new nonlinear conditional variance framework with multiple regimes and volume effects. Volatility forecast comparisons, using the Harvey-Newbold test for multiple forecasts encompassing, seem to demonstrate that the MSV-EGARCH complex threshold structure is able to correctly fit GARCH-type dynamics of the series under study and dominates competing standard asymmetric models in several of the considered stock indexes.

On Optimal Instrumental Variables Generators, with an Application to Hedge Fund Returns

In this paper, we propose a new benchmarking procedure lying on cumulants for computing the factor loadings in financial models of returns. We apply this technique to the well-known augmented Fama and French (J Fin Econ 43(2):153–193, 1997) model and compare it with another technique of ours based on higher moments. Our new procedure confirms the fact that the alpha is supposed to decrease when we disaggregate HFR indices to the level of individual funds while correcting for specification errors. Our new technique is therefore useful for hedge funds selection or ranking based on the alpha of Jensen corrected for specification errors. This technique will also be useful for calibrating other financial models of returns like the simple market model or the conditional alpha and beta models.

Micro foundations for meso and macro economic theory

The natures of rational thought and rational lives are described as the basis of an adaptive economizing theory which presents an alternative microeconomic foundation contrasting with but complementary to optimal control theory for modeling mesoeconomic order. Contrastingly, that micro foundation seems to imply the inappropriateness of representing macro data as an optimal economic agent. Rather, direct representation of the emergent causal order in the macroeconomic data is suggested.

Growth and inflation forecasts for Germany a panel-based assessment of accuracy and efficiency

We analyse forecasts of professional forecasters for Germany regarding the time span from 1970 to 2004. This novel panel data set renders it possible to assess the accuracy and efficiency of growth and inflation forecasts more efficiently than in previous studies. We argue that the forecasts are, on average, unbiased and weakly—but not strongly—efficient. Using model confidence sets suggested by Hansen et al. (2004), we find that, besides the effect of diverging forecasting dates, no other substantial differences in forecasting quality among forecasters exist. Nevertheless, on the basis of a direction-of-change analysis we argue that it is not always advisable to listen to the majority of forecasters.

Micro-heterogeneity and aggregate productivity development in the German manufacturing sector

A decomposition of aggregate productivity growth of German manufacturing firms that pertain to 11 different industries at a roughly two-digit level observed over the period 1981–1998 is performed. Productivity is measured by a nonparametric frontier function approach. The decompositions of productivity allow for an explanation of the aggregate outcomes by the quantification of the effect of structural change and the contributions of entering and exiting firms. Our results show that these forces drive aggregate productivity to a considerable extent. Remarkably, the large productivity improvements after the German reunification are mainly driven by structural change.

The organizational goal and work effort: an efficiency wage model

This paper sets up an efficiency wage model which combines goal-attainment theory and the expectancy-valence approach. Taking account of the psychological work motivation, we find that the aspiration for goal attainment may be a substitute for unemployment as an instigator of work motivation in full employment. In addition, since raising the firm’s goal has a diverse impact on the high and low need-for-achievement workers, a higher goal-setting does not appear capable of increasing worker effort within firms. This finding reconciles the conflicting experimental results in industrial psychology literature.