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.

A response to the critiques of DEA by Dmitruk and Koshevoy, and Bol

We here critique the articles by Dmitruk & Koshevoy (1991, J Econ Theory 55:121–144) and by Bol (1986, J Econ Theory 38:380–385) by showing how to solve the examples they erected to show the non-existence of functions for evaluating performance efficiencies in DEA. We also show that functions satisfying these criteria—and other important criteria as well—were already available prior to the publications of D&K and by Bol and have since been greatly extended to increase the power and scope of DEA.

A closer look at Black–Scholes option thetas

This paper investigates Black–Scholes call and put option thetas, and derives upper and lower bounds for thetas as a function of underlying asset value. It is well known that the maximum time premium of an option occurs when the underlying asset value equals the exercise price. However, we show that the maximum option theta does not occur at that point, but instead occurs when the asset value is somewhat above the exercise price. We also show that option theta is not monotonic in any of the parameters in the Black–Scholes option-pricing model, including time to maturity. We further explain why the implications of these findings are important for trading and hedging strategies that are affected by the decay in an option’s time premium.

Shadow profit maximization and a measure of overall inefficiency

Determining the profit maximizing input–output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input–output bundle where the firm’s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian [(1984) The Non-parametric approach to production analysis. Econometrica 52:3 (May) 579–597] based on shadow prices rather than actual prices. At these shadow prices, the shadow profit of a firm is zero. The maximum shadow profit that could have been attained at some other input–output bundle is shown to be a measure of the inefficiency of the firm. Because the benchmark input–output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem.

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.

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.

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.

Social responsibility: U.S. power plants 1985–1998

This study introduces an Environmental Performance Index (EPI) to assess the performance of firms that produce both good and bad outputs. In the one good output one bad output case, the EPI simplifies to the ratio of good–bad output for period t + 1 and period t. After deriving the index, data for U.S. coal-fired power plants from 1985 to 1998 are used to demonstrate insights that the EPI can provide. We find that power plants with units participating in Phase I of the Acid Rain Program experience a dramatic improvement in their EPI during 1994–1995.

The Feldstein–Horioka puzzle in Latin American and Caribbean countries: a panel cointegration analysis

In this paper, the recently developed panel unit root and the Pedroni cointegration tests are applied to empirically examine the validity of the Feldstein–Horioka puzzle (F–H puzzle) for a heterogeneous panel of 14 Latin American and five Caribbean countries over the period, 1960–2002. The findings indicate that in these countries, the long-run solvency condition is maintained. Finally, employing the Pedroni panel group FM-OLS estimator (2000, 2001), it is found that the statistically significant estimated savings-retention coefficient for the panel is relatively small indicating that the F–H Puzzle is not valid and thus implying the prevalence of a moderate degree of capital mobility.

Matching in local labor markets: a stochastic frontier approach

This paper investigates the technical efficiency of labor market matching from a stochastic frontier approach. The true fixed-effects model (Greene J Prod Anal 23:7–32, 2005a; J Econom 126:269–303, 2005b) is utilised in order to separate cross-sectional heterogeneity from inefficiency, and inefficiency terms are modelled following Battese and Coelli (Empir Econ 20:325–332, 1995). The data set consists of almost 17,000 observations from Local Labor Offices (LLOs) in Finland. According to the results, there are notable differences in matching efficiency between regions, and these differences contribute significantly to the number of filled vacancies. If all regions were as efficient as the most efficient one, the number of total matches per month would increase by over 23%. The heterogeneity of the job-seeker stock is an important determinant of matching efficiency: the weight of the composition of the job-seeker stock in the inefficiency terms is on average 85%.

The Obama effect

Many observers argued that Barack Obama’s candidacy in the U.S. presidential election of 2008 benefited from the financial crisis and recessionary economic conditions which voters blamed on the Republican administration. However, an empirical examination of stock price and public opinion data indicates that improvements in Obama’s electoral prospects led stock price declines and that gains by Obama were more likely to be followed by falling stock prices than by rising prices. This evidence suggests that the poor performance of the stock market in the days leading up to Obama’s victory was partly caused by, rather than causing, Obama’s success.

Are some Indian banks too large? An examination of size efficiency in Indian banking

In this paper we use data from the years 1997–2003 to evaluate the size efficiency, as distinct from scale efficiency, of Indian banks. Following Maindiratta [Maindiratta A (1990) J Econ 46:39–56] we consider a bank to be “too large” if breaking it up into a number of smaller units would result in a larger output bundle than what could be produced from the same input by a single bank. When this is the case, the bank is not size efficient. Our analysis shows that many of the banks are, indeed, too large in various years. We also find that often a bank is operating in the region of diminishing returns to scale but is not a candidate for break up.

The aggregation of capital over vintages in a model of embodied technical progress

The paper considers how to measure capital in a model where technical progress is embodied in new units of capital. This embodiment model also assumes that once new units of capital are installed, it cannot be “unbolted” and sold on the second hand market. A significant difference between this Solow–Harper model and the traditional capital services model due to Jorgenson and his coworkers is that rising real wage rates will generally induce early retirement of assets; i.e., this model can provide an explanation for obsolescence. The paper studies how to aggregate over vintages and how to measure depreciation in the context of this embodiment model. These problems are more complicated than the corresponding problems in the traditional capital services model because the age of retirement of an asset is endogenous in the embodiment model. The paper uses duality theory to simplify the exposition.

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.

The cost implications of waste reduction: factor demand, competitiveness and policy implications

Manufacturing produces both good and “bad” outputs, such as waste, which have negative environmental effects. Economic (e.g., tax) and non-economic (e.g., reputation) incentives encourage firms to reduce waste. However, such practices are costly because decreases in output produced or increases in inputs used may accompany waste reduction. We employ a cost function approach to evaluate patterns of output and waste production and capital, labor, and materials use, for UK manufacturing plants. We find that costs of waste reduction generally imply increasing materials use and capital and labor input saving, but vary by county, region, and industry.

The J-Curve: Evidence from commodity trade between Canada and the U.S.

Several studies in the literature have tried to assess the impact of real depreciation of the Canadian dollar on the Canadian trade balance. They have either relied on the trade data between Canada and the rest of the world or between Canada and her major trading partners. In this paper we consider the trade between Canada and her major trading partner, the U.S. However, unlike previous research, we disaggregate the trade data between the two countries by commodity. We use export and import data over the period 1962–2004 from 152 commodities and the bounds testing approach to cointegration and error-correction modeling and show that real depreciation of the Canadian dollar has short-run effects on the trade balance of two-thirds of the industries. However, only in 50% of the industries, the short-run effects translate into the long-run favorable effects.

Productivity and efficiency of state-owned enterprises in China

The purpose of this paper is to evaluate the variations in SOE efficiency and productivity from the perspectives of macroeconomic fluctuations and systematic reform in China during 1986–2003. We use Data Envelopment Analysis to measure SOE efficiency. Subsequently, we use the Malmquist Index of Productivity change to measure productivity growth. The empirical results show that SOE efficiency and productivity exhibited obvious improvements during periods of strong systematic reform and a prosperous economy. The systematic reform after 1998 had a clear-cut impact on SOE performance.

Interest rate and bank stock returns asymmetry: Evidence from U.S. banks

We use the multivariate extension of Exponential Generalized Autoregressive Conditionally Heteroscedastic (EGARCH) of Nelson, Econometrica, 59: 347–370, 1991 to test for spillover effects and examine the extent of asymmetries between short- and long-term interest rates and portfolios of money center, large, and medium-size banks in the U.S. Our results indicate the existence of price and volatility spillovers from short- and long-term interest rates to the three bank portfolios. We also provide evidence of response asymmetries for the portfolios of money center and large banks, suggesting that money center and large banks are more sensitive to negative than positive short- and long-term interest rate changes.

Do we estimate an input or an output distance function? An application of the mixture approach to European railways

In this paper, we estimate parametric input and output distance functions and discuss how to estimate a mixture/latent class model (LCM) involving the output and input distance functions in the context of multi-input and multi-output production technology. The proposed technique is applied to a panel data on European Railways (1971–1994). This model allows us to identify determinants of the efficiency orientation, thereby providing useful information that can help researchers to choose between the input and the output-oriented approaches. In addition, we develop cross-indices that can be used to compute input (output) technical inefficiency from the estimates of output (input) distance function.

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.