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.     

Decomposing TFP growth in the presence of cost inefficiency,nonconstant returns to scale,and technological progress

A thorough understanding of changes in productivity measures is important to economists and policymakers, because productivity growth is a major source of economic growth. This article explores the relationship between changes in total factor productivity (TFP) growth, defined using an index number approach, and changes in returns to scale, cost efficiency, and technology. Several decompositions are developed, using alternatively production and cost frontiers. The last decomposition developed also allows for multiple outputs.The refereeing process of this paper was handled through W.H. Greene.     

Estimation of technical change and TFP growth based on observable technology shifters

Journal of Productivity Analysis - This paper models and estimates total factor productivity (TFP) growth parametrically. The model is a generalization of the traditional production function model...     

US TFP growth and the contribution of changes in export and import prices to real income growth

Using recent data from the Bureau of Economic Analysis, the Bureau of Labour Statistics (BLS), the Board of Governors of the Federal Reserve System and the US Department of Agriculture, the paper calculates the multifactor productivity (MFP) Growth for an Extended Business Sector of the US economy for the years 1987–2011. The Extended Business Sector (EBS) consists of the entire US economy less the inputs used and outputs produced by the Public Administration sector and less the US housing sector. The study found that MFP growth in the EBS averaged 1.157 % per year, somewhat higher than BLS MFP growth in the Private Sector which averaged 0.962 % per year. The study also produced estimates of MFP where a net output concept was used. Finally, the effects of changes in the prices of US exports and imports on real income growth was calculated using a translog model based on the work of Diewert and Morrison and Kohli.     

Price-induced technical progress in 80 years of US agriculture

This paper presents a theory of technical progress that interprets the price-induced conjecture of Hicks. It provides also an exhaustive set of comparative statics conditions that constitute the scaffolding for an empirical test of the theory. A crucial assumption is that entrepreneurs make decisions about techniques on the basis of expected information about prices and quantities. Another assumption is that these decisions are made in order to fulfill a profitability objective. The novelty of our approach is that expected relative prices enter the production function as shifter of the technology frontier. The consequence of this assumption is an expansion of the traditional Shephard lemma that is useful for identifying the portion of input quantities that has been determined by the conjecture of price-induced technical progress (PITP). The theory is applied to a sample of 80 years of US agriculture. Three versions of the general model are presented. The first version deals only with expected relative prices. The empirical results do not reject the PITP hypothesis. The second and third versions introduce lagged expected relative prices, lagged R&D expenditures and lagged extension expenditures as explanatory variables of the portion of the input quantities that may be attributable to technical progress. I acknowledge invaluable discussions on this subject held over several years with Michael R. Caputo. I also acknowledge the use of the theory and its justifications that were presented in previous papers by Paris and Caputo (2001) and by Caputo and Paris (2005). All the errors are mine. I dedicate this paper to my wife, Carlene, who died of a rare cancer on May 5, 2001.     

Productivity and efficiency in the US: effects of business cycles and public capital

We add to the literature on the US productivity slowdown and effects of public capital on productivity by employing Malmquist productivity indexes to measure productivity. These indexes allow us to decompose productivity growth into efficiency change and technological innovation. We derive these components for each observation, which we exploit to explore factors which may lead to differences in productivity across regions, including business cycles, both own-state and cross-border public infrastructure investment, and relative sizes of the manufacturing, service and public sector. Our results suggest that the components of total factor productivity change lend important insights into the fairly complex effects of public capital on productivity growth.     

Energy use,technical progress and productivity growth: A survey of economic issues

In this paper I survey and interpret several of the most important aspects underlying relationships among technical progress, productivity growth, and energy use, viewed from the vantage of an economist. The first portion of the paper provides a noneconomist with a nontechnical summary of the economic theory of cost and production, and defines single-factor and multi-factor productivity growth. In the second half of the paper, four examples are presented that highlight the special role of energy consumption in inducing and reflecting the effects of technical progress and productivity growth. A common theme in the four examples is that the concepts of embodiment, diffusion and learning are critical to understanding the forces linking energy usage, technical progress and productivity growth.The refereeing process of this paper was handled through T.G. Cowing.     

Assessing the technical efficiency of public procurements in the bus transportation sector in the Czech Republic

This article examines public procurements in the regional bus transportation sector. The data were collected exclusively for this research from regional offices in the Czech Republic. This study does not propose to estimate the cost function for bus operators, as do most efficiency studies. Rather, it’ focuses on identifying the factors that influence the final price offered by participants in the tender. Knowing these factors will help to properly set the tender conditions, which can further help to improve how well the bus operator functions, and to reduce public subsidies. The study also aims to estimate the technical efficiency rate by using Data Envelopment Analysis (DEA) and find the implications of efficiency scoring for tender conditions. This statistic also enables contract owners to compare the cost differences between individual bus service providers and examine companies that operate at the efficiency frontier.     

Measuring productivity growth, technical progress, and efficiency changes of CPA firms prior to, and following the Sarbanes–Oxley Act

This paper investigates productivity growth, technical progress, and efficiency change for a group of the 56 largest CPA firms in the US from the period 1996–1999 through the period 2003–2006, where the former preceded, and the latter followed, enactment of the Sarbanes–Oxley Act (SOX). Data envelopment analysis (DEA) is used to calculate Malmquist indices of three measures of interest: productivity growth, technical progress, and efficiency change. Results indicate that CPA firms, on average, experienced a productivity growth of approx. 17% from the pre- to post-SOX period. Consistent with the finding of Banker et al. [Banker RD, Chang H, Natarajan R. Productivity change, technical progress and relative efficiency change in the public accounting industry. Management Science 2005;51:291–304], this productivity gain can be attributed primarily to technical progress rather than a change in relative efficiency. In addition, results indicate that the “Big 4” firms underperformed their non-Big 4 counterparts in both productivity growth and technical progress.     

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.

Revisiting the decomposition of cost efficiency for non-homothetic technologies: a directional distance function approach

In the early 1980’s Kopp and Diewert proposed a popular method to decompose cost efficiency into allocative and technical efficiency for parametric functional forms based on the radial approach initiated by Farrell. We show that, relying on recently proposed homogeneity and duality results, their approach is unnecessary for self-dual homothetic production functions, while it is inconsistent in the non-homothetic case. By stressing that for homothetic technologies the radial distance function can be correctly interpreted as a technical efficiency measure, since allocative efficiency is independent of the output level and radial input reductions leave it unchanged, we contend that for non-homothetic technologies this is not the case because optimal input demands depend on the output targeted by the firm, as does the inequality between marginal rates of substitution and market prices—allocative inefficiency. We demonstrate that a correct definition of technical efficiency corresponds to the directional distance function because its flexibility ensures that allocative efficiency is kept unchanged through movements in the input production possibility set when solving technical inefficiency, and therefore the associated cost reductions can be solely—and rightly—ascribed to technical-engineering-improvements. The new methodology allowing for a consistent decomposition of cost inefficiency is illustrated resorting to simple examples of non-homothetic production functions.     

The role of spatial interdependence in local government cost efficiency: An application to waste Italian sector

The paper aims to study the effect of spatial interdependence, among nearby municipalities, on public services efficiency. An empirical analysis on the waste disposal service in 4250 Italian municipalities was carried out to evaluate the efficiency of waste management expenditure, once the impact of positive/negative externalities, of neighbouring local governments, on efficiency levels is isolated. From a methodological point of view, our study extends the spatial stochastic frontier methodology proposed in Fusco & Vidoli (2013) usable only for production analysis, allowing to admit into a cost frontier the spatial autocorrelation among residuals. Ignoring spatial autocorrelation leads to inferential problems violating one of the most important assumption of classical regression models: the non-correlation of the residuals. We found a significant spatial interdependence among neighbouring municipalities in term of cost efficiency, that, thanks to the methodology proposed, has been isolated allowing a discussion on the specific efficiency of municipalities. These results may suggest the need to consider proximity effects in future investigations about the efficiency of waste management and, more generally, of public services.     

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.

Environmental externalities and regulation constrained cost productivity growth in the US electric utility industry

This paper examines whether having to comply with Phase 1 of Title IV of the 1990 Clean Air Act, and rate of return regulation, each impacted the rate of total factor productivity (TFP) growth when accounting for the production of good and bad outputs. Phase 1, effective from 1995 to 1999, requires electric utilities to reduce their emissions of sulfur dioxide and nitrogen oxide (bad outputs). Actions undertaken to reduce the emissions (using less sulfur content coal, installing equipment), may have led to higher production costs, and impacted the rate of TFP growth. Rate regulation may impact how the firm produces its selected output level, which could lead to higher cost over time, and biased estimates of TFP growth. Following the work of Ball et al. (Struct Change Econ Dyn 16(3): 374–394, 2005), who developed the standard Malmquist cost productivity (MCP) index, we develop a MCP index for a rate regulated firm (RMCP index) then use the standard and regulated indices to determine whether having to comply with Phase 1 impacted TFP growth. Empirical results indicate that (i) the RMCP index underestimated the rate at which TFP growth occurred, (ii) Phase 1 utilities on average experienced positive TFP growth from 1996 to 2000 (Phase 1 firms experienced higher TFP growth rates than the rates experienced by firms not subject to Phase 1), and operated more allocatively inefficient in complying with the Phase 1 restrictions. Complying with Phase 1 did not affect the rate at which technical change occurred or the rates of change in scale efficiency.     

Separating environmental efficiency into production and abatement efficiency: a nonparametric model with application to US power plants

In this paper we present a new approach to evaluate the environmental efficiency of decision making units. We propose a model that describes a two-stage process consisting of a production and an end-of-pipe abatement stage with the environmental efficiency being determined by the efficiency of both stages. Taking the dependencies between the two stages into account, we show how nonparametric methods can be used to measure environmental efficiency and to decompose it into production and abatement efficiency. For an empirical illustration we apply our model to an analysis of US power plants.     

Assessing environmentally sensitive productivity growth: incorporating externalities and heterogeneity into water sector evaluations

Journal of Productivity Analysis - The drinking water and wastewater services often involve heterogenous production environments and considerable negative externalities such as greenhouse gas...     

A cost efficiency analysis of the insurance industry in Mexico

In Mexico, the low participation of insurance activity in national production, in contrast to similar Latin American economies, is a concern. Industry’s regulator promoted more intense competition at the dawn of the century. Was deregulation followed by improvements in the financial and economic performance of Mexican insurance firms? The purpose of this paper is to answer this question through a comprehensive analysis of cost variations in an intertemporal manner, by breaking them down into the economic sources that produce them, including productivity. Cost frontier estimation was grounded in a joint production technology of desirable and undesirable outputs, modeled in an input-oriented fashion. Our results demonstrate that even though some companies achieved cost reductions from technological progress or improvements in efficiency, the Mexican insurance market does not show signs of significant productivity gains.     

Modeling technical progress and total factor productivity: A plant level example

Shifts in the production frontier occur because of changes in technology. A model of how a firm learns to use the new technology, or how it adapts from the first production frontier to the second, is suggested. Two different adaptation paths are embodied in a translog cost function and its attendant cost share equations. The paths are the traditional linear time trend and a learning curve. The model is estimated using establishment level data from a non-regulated industry that underwent a technological shift in the time period covered by the data. The learning curve resulted in more plausible estimates of technical progress and total factor productivity growth patterns. A significant finding is that, at the establishment level, all inputs appear to be substitutes.This paper was processed by N.R. Adam.     

A financial accelerator in the business sector of a macroeconometric model of a small open economy

We have incorporated a financial accelerator mechanism operating through investments in the business sector in a dynamic macroeconometric model of the Norwegian economy. In this new and amended model aggregated credit and equity prices are determined simultaneously in a system characterized by a two-directional contemporaneous causal link, which has been designed and estimated by a new procedure for simultaneous structural model design. Combined with a mechanism where credit and asset prices are mutually influenced by real investments, this creates a financial accelerator amplified by a credit-asset price spiral. Simulations illustrate how the introduction of a financial accelerator significantly reinforces and extends the economic cycles in projections and forecasts, in particular when confronted by a severe shock. Furthermore, monetary policy has a markedly stronger effect in the short and medium term, while the impact of fiscal policy is affected to a relatively small degree as it is more remotely linked to financial markets.     

The impact of the US on Latin American business cycles: A new approach

Business cycles in Latin America have tended to be more volatile than those in wealthier nations such as the US. Accordingly, much research has been conducted on Latin business cycles, as well as the impact of the US on such fluctuations. Some research seeks to find how “integrated” cycles are in the US and Latin America, yielding conflicting results. We apply a new method to the question of business cycle synchronization between the US and nine Latin nations. We find that in the majority of cases integration has been rising in recent years. We also find, contrary to some previous studies, that integration does not appear to be affected by either the level of trade or of capital account openness. Finally, we find that the two countries that are dollarized – Ecuador and El Salvador – appear least integrated with the US. This last finding has potentially troubling implications in terms of the ability of these nations to adjust to asymmetric shocks vis-à-vis the US.